Economic Imbalances: New Zealand's Structural Challenge
New Zealand has for a long-time lived with a large and negative international investment position, mainly in the form of private debt intermediated through the banking system. These debts create economic risks. Fortunately New Zealand's good institutional and policy arrangements provide economic resilience to avoid and respond to economic shocks. These include: relatively transparent and prudent fiscal policy; independent monetary policy; and a floating exchange rate. This resilience has also been strengthened by relatively prudent private sector lending and borrowing. However, this does not mean New Zealanders can be complacent. History shows that high levels of debt secured against elevated asset prices tend to magnify the negative impacts of economic shocks, or can cause persistent slow growth. This paper departs from typical discussions of debt imbalances by suggesting New Zealand's private debts could reflect decisions that may have been poorly made for some time. This results from long-term structural and fiscal policy settings that may have discouraged saving. In turn, this may have contributed to tighter monetary conditions than otherwise needed for price stability. This contributed to the stifling of tradables production to the detriment of economic growth. Like the recent Canterbury earthquakes, the nature of potential macroeconomic shocks and the likelihood of them eventuating are difficult to identify with precision or confidence. The sharp adjustment that should be avoided is where creditors suffer a loss of confidence in New Zealand's debtors. This would force a substantial cut to standards of living, which a policy response designed to pro-actively reduce debt may be able to avoid. Accordingly, New Zealand's government should be vigilant in pursuing fiscal and regulatory policies that continue to build resilience through encouraging individuals to strengthen their financial position.
|Date of creation:||Jun 2011|
|Date of revision:|
|Contact details of provider:|| Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand|
Phone: +64-4-472 2733
Fax: +64-4-473 0982
Web page: http://www.treasury.govt.nz
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Daan Steenkamp, 2010. "New Zealand’s imbalances in a cross-country context," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 73, pages 37-49, December.
- Richard Fabling & Lynda Sanderson, 2010. "Exporting and performance: Market entry, expansion and destination characteristics," Reserve Bank of New Zealand Discussion Paper Series DP2010/07, Reserve Bank of New Zealand.
- Reinhart, Carmen & Reinhart, Vincent, 2010.
"Diminished Expectations, Double Dips, and External Shocks: The Decade After the Fall,"
24969, University Library of Munich, Germany.
- Carmen M. Reinhart & Vincent Reinhart, 2010. "After the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 17-60.
- Kevin Hoskin & Ian Nield & Jeremy Richardson, 2009. "The Reserve Bank's new liquidity policy for banks," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 72, pages 5-18, December.
- Bob Buckle & Aaron Drew, 2006. "Testing stabilisation policy limits in a small open economy: editor's summary of a macroeconomic policy forum," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 9p, December.
- Patricia Fraser & Martin Hoesli & Lynn Mc Alevey, .
"House Prices and Bubbles in New Zealand,"
Swiss Finance Institute Research Paper Series
06-20, Swiss Finance Institute.
- Reinhart, Carmen, 2009.
"The Second Great Contraction,"
21485, University Library of Munich, Germany.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, number 8973, 01-2013.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009.
"Varieties of Crises and Their Dates
[This Time Is Different: Eight Centuries of Financial Folly]," Introductory Chapters, Princeton University Press.
- Òscar Jordà & Moritz Schularick & Alan M Taylor, 2011.
"Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons,"
IMF Economic Review,
Palgrave Macmillan, vol. 59(2), pages 340-378, June.
- Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2010. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," NBER Working Papers 16567, National Bureau of Economic Research, Inc.
- Emmanuel De Veirman & Ashley Dunstan, 2008. "How do Housing Wealth, Financial Wealth and Consumption Interact? Evidence from New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/05, Reserve Bank of New Zealand.
- Sean Collins & Francisco Nadal De Simone & David Hargreaves, 1998. "The current account balance: an analysis of the issues," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, March.
- W. Max Corden, 1991. "Does The Current Account Matter? The Old View And The New," Economic Papers, The Economic Society of Australia, vol. 10(3), pages 1-19, 09.
- Sebastian Edwards, 2005.
"The End of Large Current Account Deficits, 1970-2002: Are There Lessons for the United States?,"
NBER Working Papers
11669, National Bureau of Economic Research, Inc.
- Sebastian Edwards, 2005. "The end of large current account deficits : 1970-2002 : are there lessons for the United States?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 205-268.
- Chris Hunt, 2008. "Financial turmoil and global imbalances: the end of Bretton Woods II?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 71, September.
When requesting a correction, please mention this item's handle: RePEc:nzt:nztwps:11/03. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Web and Publishing Team, The Treasury)
If references are entirely missing, you can add them using this form.