Reserve Bank of New Zealand Bulletin articles

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March 2003 (Vol 66, no 1)

Download the complete issue of the March 2003 bulletin (PDF 249KB)

Articles

Editor's Note (PDF 17KB)

The output gap and its role in monetary policy decision-making (PDF 60KB)

By Florin Citu and James Twaddle
Understanding the link between the real economy and inflation is essential to monetary policy formulation. In conventional macroeconomics, the concept of the output gap is an important component of that link. Used in this context, the output gap provides a useful way of thinking about inflationary pressure in the economy. This article discusses the output gap concept, its strengths and weaknesses, and how it fits into the monetary policy process at the Reserve Bank. While the output gap is a useful device in assisting the understanding and forecasting of inflation developments, it does have weaknesses. The output gap is unobservable, and developing reliable estimates of it is a key weakness. A second is the possibility that the linkage between the real economy and inflation is not well represented by models or frameworks that use the output gap concept. Being alert to these weaknesses, the Reserve Bank looks at a range of other indicators of inflationary pressure when formulating monetary policy and uses judgement where appropriate.

Financial sector assessment programme (PDF 31KB)

By Geof Mortlock and Ian Woolford
New Zealand is scheduled to undergo an assessment by the International Monetary Fund (IMF) later this year under the Financial Sector Assessment Programme (FSAP). The FSAP is a relatively new surveillance and assessment programme developed and jointly managed by the International Monetary Fund and World Bank. It is designed to assess the potential vulnerabilities in a country's financial system and to evaluate the adequacy of financial sector regulation and supervision, using international standards and codes as benchmarks, as well as a number of other analytical tools. There is an expectation that all IMF member countries will undergo an FSAP assessment periodically. New Zealand has volunteered to be assessed this year. This article explains the FSAP and discusses the key elements within it. Later this year and in 2004, the Bulletin will include articles that draw from our experience of the FSAP and the work being undertaken by the Reserve Bank and other government agencies in preparation for it. Indeed, the article on the New Zealand payment system in this issue of the Bulletin is one of these, and makes considerable reference to FSAP-related work in the area of the payment system.

Recent developments in the payment system (PDF 56KB)

By Allison Stinson and Michael Wolyncewicz
Payment systems have attracted increasing interest in recent years. They provide important linkages between different parts of the financial sector and support economic activity more generally. The weaknesses and risks in a payment system, however, can also pose a threat to financial stability. Accordingly, international and national initiatives to strengthen financial infrastructures have included the payment and settlement `plumbing' of the financial system. This article outlines key developments occurring internationally and domestically in the payment system arena, including measures affecting the Bank's operational and oversight activities.

Introducing overnight indexed swaps (PDF 44KB)

By Wai Kin Choy
Last year, a new type of financial instrument - the Overnight Indexed Swap (OIS) - was introduced to New Zealand. This article is intended as a primer, explaining what the OIS is and how it is used by market participants to manage interest rate risks and to take a view on the direction of the Official Cash Rate (OCR). From the Bank's perspective, we are most interested in using OIS yields to derive estimates of market expectations of the OCR. This article also highlights developments in the New Zealand OIS market to date.

The legal history of money in New Zealand (PDF 47KB)

By Ken Matthews
A central bank's stock in trade is money. This is no less true in New Zealand than in any other country. It is perhaps not surprising, therefore, that the Reserve Bank takes more than a passing interest in the historical development of notes and coins in New Zealand. This article summaries the legal history of money in New Zealand, beginning in the early days of colonisation and tracing the key developments through to the modern era. Although the focus of the article is on the development of the legal framework governing notes and coin, rather than other aspects of money, it also discusses some of the economic and social issues that shaped these legal developments. The history of money law in New Zealand is an example of how an emerging country developed an area of law necessary for the state to function, and how those laws were influenced by social and economic factors. In this article, we look at five key periods in the history of money in New Zealand:
· The period of legal uncertainty (1840 to 1844)
· Experimentation (1844 to 1861)
· Privately issued money (1861 to 1893)
· Periods of financial stress (1893 to 1933)
· Nationalisation of the currency (1933 to the present).

Speech

Making sense of a rising exchange rate (PDF 24KB)

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

The views expressed are those of individual authors and do not necessarily reflect official positions of the Reserve Bank of New Zealand. Articles published in this Bulletin may not be wholly or substantially reproduced without the permission of the Reserve Bank of New Zealand. Data, brief extracts from articles, and other material appearing in the Bulletin, may be used without restriction provided due acknowledgement is made of the source.