Reserve Bank of New Zealand Bulletin articles
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June 2007 (Vol. 70, no 2)
Download the complete issue of the June 2007 Bulletin (PDF 682KB)
Articles
Editor’s Note (PDF 40KB)
The transmission mechanism of New Zealand monetary policy (PDF 216KB)
In the first of two articles on the transmission mechanism of New Zealand monetary policy, we provide a detailed account of the process by which changes in the Reserve Bank’s primary monetary policy instrument, the Official Cash Rate (OCR), eventually come to influence the general level of prices. As such, the article is a guide to how the Bank perceives policy decisions to propagate through the New Zealand economy, and to the relative weight it assigns to the strengths of the various channels that together comprise the transmission mechanism. A second article, to be published in a forthcoming issue of the Bulletin, considers how this mechanism may have changed over time and how this has influenced the implementation of monetary policy in the most recent business cycle.
A review of the trade weighted exchange rate index (PDF 235KB)
Over the past year the Bank has completed a review of the official trade weighted index (TWI). This article documents that review, noting issues of importance when considering the most appropriate effective exchange rate for a central bank, and presenting a number of different weighting methodologies. Whilst different effective exchange rate indices are suited to different purposes, at this time we believe the current official five-currency TWI remains a good summary measure for monetary policy purposes. However, the Bank will also begin publishing an extended 14 currency TWI, which includes the currencies of a number of Asian economies with which New Zealand’s bilateral trade has increased markedly in recent years. This ‘extended’ TWI will be published on the Bank’s website as an analytical series and the properties of the series will be further monitored as trade flows develop.
The Reserve Bank’s policy on outsourcing by banks (PDF 62KB)
This article explains the Reserve Bank of New Zealand’s policy on outsourcing by banks. Banks in New Zealand typically outsource a range of business activities, both to independent and to related-party service providers, and both domestically and offshore. The predominance in our banking system of banks owned by offshore parent banks, who provide important services to their subsidiaries, means that cross-border, related-party outsourcing is of particular relevance. The outsourcing policy requires a large bank’s board to maintain legal and practical control over any outsourced functions such that the bank is able to continue to play its key role of supporting financial activity in the economy, both under normal circumstances and (particularly) under stress. The Reserve Bank applies the policy with some flexibility to suit the circumstances of individual banks. The policy thus ensures that the banking system retains the ability to avert distress, and underpins the Reserve Bank’s ability to manage a financial crisis, while enabling the financial system to enjoy the benefits of foreign bank participation.
Financial literacy and its role in promoting a sound financial system (PDF 156KB)
This article discusses the importance of financial literacy. Financial literacy – the ability to make informed judgements and decisions regarding the use and management of money – is important for individual consumers of financial services, the financial system and the wider economy. It influences how people save, borrow, invest and manage their financial affairs. It therefore affects their capacity to grow their wealth and income, and has significant implications for people’s lifestyle choices. Financial literacy also has a significant part to play in influencing how financial institutions – such as banks, non-bank deposit takers and insurers – manage their affairs and what products they provide. Because financial literacy influences people’s investment decisions, including risk/return tradeoffs, it also affects how resources in the economy are allocated. In turn, this has implications for the potential growth rate and stability of the economy.
Accordingly, the main theme of this article is that financial literacy matters – at many different levels. The focus of this article is on financial literacy at the household and individual level. Research raises some concerns regarding financial literacy in New Zealand. The evidence suggests that many New Zealanders have limited financial literacy. The Retirement Commission and other government agencies are working to improve financial literacy levels. The private sector has also taken initiatives in this area. Work is under way to strengthen the regulation of financial advisers and to improve financial disclosure by issuers of securities to the public. However, there appears to be a need for further initiatives to raise the level of financial literacy in New Zealand. These initiatives should be accompanied by others to improve the delivery of user-friendly financial information to investors and consumers. This article explores the potential for further work in these areas.
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.
