New Discussion Papers available on RBNZ website
The following Discussion Papers have been released on the Reserve Bank's website. The discussion papers are available at http://www.rbnz.govt.nz/research/discusspapers/
Financial exposure and the international transmission of financial shocks (PDF)
Kamber, Gunes; Thoenissen, Christoph
This paper analyses the transmission mechanism of banking sector shocks in an international real business cycle model with heterogeneous bank sizes. We examine to what extent the financial exposure of the banking sector affects the transmission of foreign banking sector shocks. In our model, the more exposed domestic banks are to the foreign economy via lending to foreign firms, the greater are the spillovers from foreign financial shocks to the home economy. The model highlights the role of openness to trade and the dynamics of the terms of trade in the international transmission mechanism of banking sector shocks Spillovers from foreign banking sector shocks are greater the more open the home economy is to trade and the less the terms of trade respond to foreign shocks.
What happens when the Kiwi flies? Sectoral effects of the exchange rate shocks (PDF)
Karagedikli, Özer; Ryan, Michael; Steenkamp, Daan; Vehbi, Tugrul
We estimate a Factor Augmented Vector autoregression (FAVAR) to identify idiosyncratic exchange rate shocks and examine the effects of these shocks on different sectors of the economy. We find that an unexpected shock to the exchange rate has significant effects on the tradable sector of the economy. While this is expected, the non-tradable sectors of the economy are also influenced by shocks to exchange rate. We argue that one important channel for this in influence is the endogenous/cyclical nature of the population dynamics due to permanent and long term migration.
Dissecting the dynamics of the US trade balance in an estimated equilibrium model (PDF)
Jacob, Punnoose; Peersman, Gert
In an estimated two-country DSGE model, we find that shocks to the marginal efficiency of investment account for more than half of the forecast variance of cyclical fluctuations in the US trade balance. Both domestic and foreign marginal efficiency shocks generate a strong effect on the variability of the imbalance, through shifts in international relative absorption. On the other hand, shocks to uncovered interest parity and foreign export prices, which transmit mainly via the terms of trade and exchange rate, have a strong influence at short forecast-horizons, before the investment disturbances begin their dominance.
Deep habits, price rigidities and the consumption response to Government spending (PDF)
This paper presents the novel implications of introducing price rigidities into a model of good-specific habit formation, for the response of private consumption following a positive government spending shock. With 'deep' habits in demand, the price elasticity of demand rises after the fiscal expansion and it is optimal for the firm to lower the mark-up while increasing production. This in turn raises the demand for labour and the real wage rises. Consequently, agents raise consumption at the expense of leisure and overcome the negative wealth effect of the fiscal shock. We show that increasing price stickiness in a model with deep habits hinders the crowding-in of consumption. If the degree of price stickiness is high enough, consumption is crowded out by government spending. These dynamics are in stark contrast to those in traditional models where price rigidities are known to weaken the crowding-out of consumption.
A tractable framework for zero lower bound Gaussian term structure models (PDF)
When nominal interest rates are near their zero lower bound (ZLB), as in many developed economies at the time of writing, it is theoretically untenable to apply the popular class of Gaussian affine term structure models (GATSMs) given their inherent material probabilities of negative interest rates. Hence, I propose a new and tractable modification for GATSMs that enforces the ZLB, and which approximates the fully arbitrage-free but much less tractable framework proposed in Black (1995). I apply my framework to United States yield curve data, with robust estimation via the iterated extended Kalman filter, and first show that the two-factor results are very similar to those from a comparable Black model. I then estimate two- and three-factor models with longer-maturity data sets to illustrate that my ZLB framework can readily be applied in circumstances that would be computationally burdensome or infeasible within the Black framework.