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Working paper

The Impact of Monetary Policy on New Zealand Business Cycles and Inflation Variability (WP 03/09)

Issue date: 
Sunday, 1 June 2003
Status: 
Current
View point: 
Document Date: 
Publication category: 
JEL classification: 
C22 - Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
E32 - Business Fluctuations; Cycles
E52 - Monetary Policy
E58 - Central Banks and Their Policies
Fiscal year: 
2002/03

Formats and related files

This paper uses the open economy structural VAR model developed in Buckle, Kim, Kirkham, McLellan and Sharma (2002) to evaluate the impact of monetary policy on New Zealand business cycles and inflation variability and the output/inflation variability trade-off.

Abstract

This paper uses the open economy structural VAR model developed in Buckle, Kim, Kirkham, McLellan and Sharma (2002) to evaluate the impact of monetary policy on New Zealand business cycles and inflation variability and the output/inflation variability trade-off. The model includes a forward-looking Taylor Rule to identify monetary policy and the impact of monetary policy is evaluated by deriving a monetary policy index using a procedure suggested by Dungey and Pagan (2000). Monetary policy has generally been counter-cyclical, thereby reducing business cycles and inflation variability. Exceptions are in 1994 and 1995 when monetary policy accentuated the business cycle upswing and in 1998 when monetary policy accentuated the recession, although its impact in 1998 was small relative to the impact of adverse climatic conditions. During the initial years of inflation targeting monetary policy tended to simultaneously reduce inflation and output variability. From 1996 to 2001 monetary policy was less effective in reducing inflation and output variability. This latter period included a brief experiment with a Monetary Conditions Index, the Asian crisis and a large adverse domestic climate shock.

Acknowledgements

The authors thank Iris Claus, John Creedy, Mardi Dungey, Arthur Grimes, David Hargreaves, Alfred Haug, Ozer Karagedikli, Chris Plantier and Brendon Riches for helpful discussions and suggestions during the preparation of this paper. Comments from participants at a New Zealand Econometrics Study Group meeting in August 2002 and a Reserve Bank of New Zealand seminar in June 2003 are gratefully acknowledged. Thanks are also due to Jenny Fenwick and David Law for their assistance with the preparation of diagrams and formatting.

Disclaimer

The views expressed in this Working Paper are those of the author(s) and do not necessarily reflect the views of the New Zealand Treasury. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

Last updated: 
Wednesday, 24 October 2007