Reserve Bank of New Zealand Bulletin articles

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September 2002 (Vol 65, no 3)

September 2002 (Vol 65, no 3)

Download the complete issue of the September 2002 bulletin (PDF 370KB)

Articles

Editors Note (PDF 15KB)

An optimal inflation target for New Zealand: lessons from the literature (PDF 62KB)

By Anne-Marie Brook, Özer Karagedikli and Dean Scrimgeour
In this article we summarise the recent economic literature on the relationship between inflation and growth, to assess what inflation target might be most consistent with the fastest pace of sustainable economic growth. One conclusion is that the relationship between inflation and growth seems to be different at different rates of inflation. At very low rates of inflation, including the 0 - 3 per cent range, the growth rate seems to be independent of the inflation rate. But at higher rates of inflation, there is evidence that inflation does significant damage to growth. There is some theoretical literature which cautions central banks against deflation, and therefore against including zero in an inflation target range. As yet there is little data available with which to test this presumption. Based on the theoretical arguments, we conclude that the risks of New Zealand being caught in a deflationary trap are low. Overall, we conclude that average rates of inflation in New Zealand have been within the `optimal inflation range' suggested by the literature. Interested readers may wish to consult a longer and more comprehensive version of this paper, contained in the Bank's publication on PTA related issues.

Recent developments in New Zealand's financial stability (PDF 202KB)

By Aron Gereben, Leslie Hull and Ian Woolford
This article assesses the current state of, and threats to, financial stability in New Zealand. It does this against the backdrop of a particularly uncertain external environment. It concludes that, despite the current slowdown in global activity, substantial falls in international share prices, and high profile corporate failures, there do not appear to be any immediate concerns for financial stability locally: banks are well capitalised, corporate balance sheets appear healthy, and although household leverage is high by international standards, it has been stable recently.

Strengthening market disciplines in the financial sector (PDF 77KB)

By Geof Mortlock
This article discusses the role of market disciplines in the financial sector. It is a slightly amended version of a paper prepared recently under the auspices of the APEC Finance Ministers' forum, summarising the key points to emerge from an APEC conference on market disciplines and the role they can play in promoting financial stability. Market disciplines are an important element in promoting sound and efficient financial systems. In a well-functioning market, financial institutions with poorly developed risk management structures tend to be penalised by the market through higher funding costs, while those with prudent risk management structures tend to be rewarded. In the longer term, weaker financial institutions will be weeded from the system, leading to a healthier and more dynamic financial system that is better able to meet the needs of the wider economy. Unfortunately, many government interventions and policies tend to impede the effectiveness of market disciplines, such as widespread government ownership of banks, government guarantees of bank deposits, a presumption that insolvent banks will be rescued by the government, and poorly functioning financial markets. Weak market disciplines have been a major cause of financial crises in recent years in many countries, resulting in severe economic and social costs. This article discusses these issues and assesses the types of policies required to strengthen market disciplines. It also discusses the need to strike a sensible balance between promoting effective market disciplines on the one hand, while seeking to avoid the dangers associated with market over-reaction or extreme market volatility, on the other.

Results of Bulletin readers survey (PDF 19KB)

During April and May this year, the Bank conducted a survey of Bulletin readers to obtain their views on a range of matters in relation to the Bulletin. This note summarises the results of the survey.