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The Latest Reserve Bank Discussion Papers

The Latest Reserve Bank of New Zealand Discussion Papers

19 May, 2006

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/


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DP2006/03
A Small New Keynesian Model of the New Zealand Economy
Philip Liu
http://www.rbnz.govt.nz/research/discusspapers/dp2006.html

DP2006/04
Other stabilisation objectives within an inflation targeting regime: Some stochastic simulation experiments
Tim Hampton, David Hargreaves and James Twaddle
http://www.rbnz.govt.nz/research/discusspapers/dp2006.html

DP2006/05
Should Monetary Policy Attempt to Reduce Exchange Rate Volatility in New Zealand?
Dominick Stephens
http://www.rbnz.govt.nz/research/discusspapers/dp2006.html

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DP2006/03

A Small New Keynesian Model of the New Zealand Economy

Philip Liu

http://www.rbnz.govt.nz/research/discusspapers/dp2006.html

Abstract

This paper investigate whether a small open economy DSGE-based New Keynesian model can provide a reasonable description of key features of the New Zealand economy, in particular the transmission mechanism of monetary policy. The main objective is to design a simple, compact, and transparent tool for basic policy simulations. The structure of the model is largely motivated by recent developments in the area of DSGE modelling. Combining prior information and the historical data using Bayesian simulation techniques, we arrive at a set of parameters that largely reflect New Zealand's experience over the stable inflation targeting period. The resultant model can be used to simulate monetary policy paths and help analyze the robustness of policy conclusions to model uncertainty.


DP2006/04

Other Stabilisation Objectives within an Inflation Targeting Regime: Some Stochastic Simulation Experiments

Tim Hampton, David Hargreaves and James Twaddle

http://www.rbnz.govt.nz/research/discusspapers/dp2006.html

Abstract

We use the Reserve Bank of New Zealand's macroeconomic model (FPS) to look at the feasibility of using monetary policy to reduce variability in output, the exchange rate and interest rates while maintaining an inflation target. Our experiment suggests that policy could be altered to increase the stability of interest rates, the exchange rate, inflation, or output, relative to the base case reaction function in FPS, but such a policy would incur some cost in terms of the variability of the other variables. In particular, we find that greater exchange rate stability would have relatively large costs in terms of the stability of all three other variables, primarily because monetary policy that leans too dramatically against exchange rate disturbances can create significant real economy variability. Relative to West (2003), we find larger costs of operating monetary policy to achieve exchange rate stabilisation. We attribute this finding to the relatively inertial inflation expectation process in FPS.


DP2006/05

Should Monetary Policy Attempt to Reduce Exchange Rate Volatility in New Zealand?

Dominick Stephens

http://www.rbnz.govt.nz/research/discusspapers/dp2006.html

Abstract

Previous research has suggested that including exchange rate stabilisation within the goals of monetary policy significantly increases the volatility of inflation, output and interest rates, and that the benefits of exchange rate stabilisation therefore do not justify the costs. The current paper tests whether this finding is robust when various alternative models of exchange rate determination are considered. The analysis is carried out in the context of optimal full-information monetary policy rules in a New Keynesian model that is calibrated to represent the New Zealand economy. For the models that feature rational expectations, we support the conclusion that seeking to avoid exchange rate volatility would have more costs than benefits. Indeed, a major cost of including the exchange rate within the goals of monetary policy is that inflation expectations become less anchored to the inflation target, meaning that larger movements in nominal interest rates are required to control inflation.


ENDS

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