Analytical Notes
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Analytical Notes is a series of research and analytical papers from the Reserve Bank of New Zealand. It encompasses a range of background papers prepared by Reserve Bank staff.
Unless otherwise stated, views expressed are those of the authors, and do not necessarily represent the views of the Reserve Bank.
Analytical Notes for 2012
Market Perceptions of Exchange Rate Risk (PDF 654 KB)by Michelle Lewis, December 2012 AN 2012/12
The prices for foreign exchange options allow us to extract information on implied market perceptions of future exchange rate risk. This note illustrates the techniques, looking at the behaviour of the New Zealand dollar over recent years. Our analysis suggests that the behaviour of the NZD/USD market has changed significantly since the global financial crisis. During the crisis, markets became increasingly uncertain and the balance of risks changed significantly with the market placing much more weight on the chance of depreciation than of appreciation. Although volatility in the NZD/USD is currently quite low, the market continues to price significantly more risk of depreciation than of appreciation.
Building a picture of New Zealand manufacturing (PDF 249 KB)by Gael Price, November 2012 AN 2012/11
New Zealand manufacturing activity fell sharply in the 2008/09 recession, and there has been only a modest recovery since then (something seen in other countries too). Exports of (non-primary) manufactured goods have held up relatively well, but domestic production and sales have been weak. Our analysis suggests that the very weak domestic construction sector can explain much of the continued weakness in manufacturing activity.
Modelling New Zealand mortgage interest rates (PDF 1 MB)by Enzo Cassino, November 2012 AN 2012/10
Determinants of New Zealand mortgage interest rates are examined, including how changes in the OCR are transmitted through the wholesale cost of funds to mortgage rates. Mortgage rates are modelled as a mark-up over banks' marginal funding cost. The results suggest that banks frequently diverge from a simple marginal cost-pricing model. Marginal cost pricing of mortgages appears to hold only in the long run. Floating mortgage rates and short-term fixed rates are closest to showing a full pass-through of changes in marginal costs.
Do actual and/or expected OCR changes affect the New Zealand dollar? (PDF 384KB)by Jason Wong and Bevan Cook, October 2012 AN 2012/09
This note analyses the relationship between actual and expected Official Cash Rate (OCR) changes and subsequent exchange rate movements. It concludes that there has been a weak positive relationship between OCR changes (or expected changes) and the currency, but that this only applies over very short time periods. Many variables affect the New Zealand exchange rate and previous research has suggested that there are much more dominant drivers of the currency than interest rates, such as commodity prices.
Extending the Reserve Bank's macroeconomic balance model of the exchange rate (PDF 481KB)by James Graham and Daan Steenkamp, October 2012 AN 2012/08
The exchange rate matters a lot in New Zealand and the Reserve Bank uses several different models, each imprecise, to analyse it. This note focuses on just one of those approaches: the macro-balance model of the exchange rate. We use that model to estimate the exchange rate which, if sustained, would stabilise at around current levels the negative net international investment position (as a percentage of GDP). The sensitivity of the model estimates to some of the key assumptions is illustrated.
Risk, return, and beyond: A conceptual analysis of some factors influencing New Zealanders' investment decisions (PDF 291KB)by Elizabeth Watson, October 2012 AN 2012/07
This note presents the data and technical detail underlying a new set of estimates of gross asset returns since 1989 for a wide range of assets relevant to New Zealanders. The estimates have an economy-wide lens. An individual investor is likely to be interested in the realised risk and return they can achieve, as determined by a range of additional factors like taxes or personal circumstances. The analysis presented here is designed to illustrate conceptually the construction of a diversified portfolio and the practical advantage in doing so in a world of considerable uncertainty.
View the summary of estimates (XLS 43KB).
by Rebecca Craigie, David Gillmore and Nicolas Groshenny, September 2012 AN 2012/06
We compare the current recovery in the New Zealand economy with the recoveries from the previous two recessions, focusing on the developments in the labour market. By way of comparison, we contrast the New Zealand situation with that of the United States, during its current and previous two recessions. Our main findings are (1) the current recovery in New Zealand has been slower than following previous recessions; (2) during this period the labour market has been subdued and (3) growth in employment (and hours) has been higher than would normally be expected, given the rate of GDP growth, implying a lack of productivity growth.
A model for interest rates near the zero lower bound: An overview and discussion (PDF 670KB)by Leo Krippner, September 2012 AN 2012/05
Operating monetary policy when interest rates are already at or near zero comes with many challenges, as many countries have discovered in recent years. One aspect is that, if effective easing beyond a zero policy rate is desired, the policy rate constrained at zero will no longer conveniently summarise the stance of monetary policy and its typical transmission into the yield curve (longer-maturity interest rates) and the economy. In this note, I show how a framework for representing yield curve data in a zero lower bound (ZLB) environment can still allow monetary policy to be conveniently summarised in terms of an effective policy rate.
In search of greener pastures - improving the REINZ farm price index (PDF 142KB)by Ashley Dunstan and Chris McDonald, July 2012 AN 2012/04
A good farm price measure captures the price that a 'representative' farm would sell for each period. In reality, though, there is no representative farm and, even if there was, it would not sell every period anyway. Farms are not like bottles of milk. They are not identical and their prices are not easily comparable. Moreover, farm price measures must rely on a small, and changing, sample of farm sales from which they must disentangle like-for-like price changes. Keeping in mind that the quality of any farm price measure will be limited by the low number of farm sales, particularly during periods of stress, this paper sets out to improve on currently available measures of farm prices by controlling for the different characteristic of farms sold.
Currency intervention - the profitability of some recent international experiences (PDF 961KB)by Enzo Cassino and Michelle Lewis, June 2012 AN 2012/03
In recent years there have been high profile currency interventions by the Swiss National Bank (SNB) and the Bank of Japan (BoJ). In this note, we review these interventions, with a focus on the profitability of currency intervention, along with the relationship between profitability and the degree of exchange rate stabilisation. We also highlight the ways in which these interesting international episodes are of only limited direct relevance to thinking about current New Zealand exchange rate issues.
Kiwi drivers - the New Zealand dollar experience (PDF 2MB)by Chris McDonald, May 2012 AN 2012/02
On 1 August 2011 the Reserve Bank's trade-weighted exchange rate index (TWI) rose to 75. The only previous time that this level was reached since the exchange rate was floated in 1985 was in July 2007. On both of these occasions, the high level of the TWI was matched by the ANZ commodity price index, which itself reached levels not seen in 30 years. The close timing of these peaks was almost certainly no coincidence. In this paper, we quantify this relationship and consider its importance for explaining the New Zealand dollar over the past 25 years relative to the many other influences, such as housing cycles and interest rate differentials.
House price expectations of households: A preliminary analysis of new survey data (PDF 1MB)by Graham Howard and Özer Karagedikli, February 2012 AN 2012/01
People's expectations of future house prices appear to be an important influence on house prices and the volume of house sales. The Reserve Bank has often referred to the importance of house price expectations but unlike many other variables we have had little detailed data on these expectations for analysis. The Reserve Bank has attempted to fill this gap by adding new questions on one-year-ahead house price expectations into the Reserve Bank's quarterly survey of households' inflation expectations. The questions were piloted in the March 2011 quarter survey. We now have results available from the June, September, December 2011 and March 2012 quarter surveys. In this note we introduce the new survey questions and discuss the initial results.
Analytical Notes for 2011
The macroeconomic impact of the Rugby World Cup (PDF 288KB)By Adam Richardson, August 2011 AN 2011/01
Rugby World Cup 2011 kicks off in September 2011. The tournament will be a significant event for New Zealand. The Reserve Bank's main interest is in how the tournament affects domestic economic activity, capacity pressures and New Zealand's national accounts. This article aims to outline the Reserve Bank's current estimates of these impacts and to identify where some of the key uncertainties lie.
All Analytical Notes are in Adobe Acrobat PDF format. If you don't have the free Acrobat Reader necessary to read these articles installed, you can download it from the Adobe website.
