Reserve Bank of New Zealand Bulletin articles

(NB. If you do not have the free Acrobat reader software necessary to read these discussion papers already installed, go to the Adobe website.)

December 2002 (Vol 65, no 4)

December 2002 (Vol 65, no 4)

Download the complete issue of the December 2002 bulletin (PDF 354KB)

Articles

Editor's Note (PDF 19KB)

The Reserve Bank's forecasting performance (PDF 209KB)

By Sharon McCaw and Satish Ranchhod
For most of the period since 1994, the target range for annual Consumers Price Index (CPI) inflation, established by the Policy Targets Agreements (PTA), was 0 to 3 per cent. Over this period, actual CPI inflation has averaged 2 per cent. As one might expect, analysis shows that our medium-term CPI inflation forecasts since 1994 have been biased towards under-prediction, which is the subject of this article.

In any particular period, inflation is unlikely to be exactly as forecast, given that the economy is affected by unforeseeable events and inflation is far from perfectly controllable. However, it is important to have a good understanding of why inflation has evolved as it has, and not as predicted. We need to know whether particular events in the period under consideration have dominated inflation outcomes, or whether there is a fundamental problem with the policy process - such as a fundamental misunderstanding of the workings of the economy - that would systematically affect future monetary policy outcomes unless corrected.

In this article we focus particularly on our CPI inflation forecasting performance, but also examine our forecasts of other key macroeconomic variables, given their relevance for explaining our CPI forecasts.

We conclude that, in the mid-1990s, underestimation of growth, and overestimation of the economy's capacity to grow without generating inflation pressures, were the source of most of our under-prediction of medium-term CPI inflation. From 1998 until recently, the major factor explaining the under-prediction of inflation appears to have been sizeable and persistent differences between the assumptions we used for the path of the exchange rate and its actual evolution.

We also conclude that contributions to forecast inaccuracies have at times been made by our understanding of the noninflationary output growth rate, the equilibrium exchange rate and exchange rate pass-through into CPI inflation. However, these factors do not appear to be systematic sources of inflation forecast bias.

Managing New Zealand's foreign reserves (PDF 96KB)

By Tore Hayward, Paxton McKenzie and Warren Potter,
New Zealand holds foreign exchange reserves primarily to enable the Reserve Bank to intervene in the New Zealand currency market if serious liquidity problems were to develop. Holding reserves involves balancing a number of factors. We need to have assets that we can readily convert into cash in a crisis. But holding reserves costs money. We want to minimise that cost wherever possible, but we want to do so without exposing the Bank to undue financial risks. Much of this article is about how we balance these considerations and about the framework used to manage the risks associated with our foreign reserves operation. It also discusses our active management approach, undertaken with the objectives of reducing the risk-adjusted cost of holding reserves and enhancing our understanding of financial markets, and the relevant statutory provisions governing foreign exchange intervention and reserves.

Corporate behaviour and the balance of payments (PDF 42KB)

By Leslie Hull
Balance of payments data are sometimes used to try to predict currency or financial crises. A high current account deficit relative to GDP, a large proportion of external debt relative to equity flows, and a large proportion of investment portfolio flows versus longer-term debt or direct investment have been considered "warning signals" of potential impending financial crises in some economies. Using balance of payments data for these purposes suggests the need for a careful understanding of what underlies the data.

This article aims to further our understanding of some of the elements in New Zealand's balance of payments current account and financial account data so that we can make more insightful interpretations of developments in the balance of payments. It provides several examples of how corporate financing choices could affect measured flows. Because of legal arrangements, certain corporate transactions may result in the overstatement of one type of capital flow relative to another in economic terms. Therefore, analysis of capital flows at face value could be misleading when interpreting the flows from a macro-financial stability perspective.

Speech

The evolution of monetary policy in New Zealand: a speech to the Rotary Club of Wellington (PDF 26KB)

Alternatively, link to the html version of this speech by Dr Alan Bollard.