Recent Reserve Bank discussion papers (with abstracts)
Reserve Bank discussion and research papers present the detailed scholarly research of staff economists and visiting scholars. The papers are published throughout the year mainly for academic and professional economists.
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Papers for 1997
G97/9
Estimating potential output: a semi-structural approach
As part of the new macroeconomic modelling project at the Reserve Bank of New Zealand, considerable effort has been directed towards constructing an historical estimate of the productive capacity of the New Zealand economy. The technique documented in this paper augments the stochastic-trend estimation approach of the Hodrick-Prescott (1997) filter with information from broad macroeconomic relationships. This strategy is designed to improve the accuracy with which the filter identifies supply (trend) and demand (cyclical) disturbances in New Zealand real output data. The evolution of inflation over the historical period is now more highly correlated with the estimated demand cycles. Further, the conditioning information improves the updating properties of the estimation technique, relative to the Hodrick-Prescott filter.
G97/8
Inflation targeting in an open economy: strict or flexible inflation targeting?
The author discusses "inflation targeting in an open economy and, in particular, about the choice between "strict" and "flexible" inflation targeting."
G97/7
A robust measure of core inflation in New Zealand, 1949-96
This paper develops a stochastically-based method of measuring core inflation, extending earlier research by Bryan and Cecchetti (1993) and Roger (1995).
G97/6
The alleged instability of nominal income targeting
Recently it has been argued that a monetary policy of nominal income targeting would result in dynamically unstable processes for output and inflation. That result holds in a theoretical model that includes backward-looking IS and Phillips curve relations, but these are rather special and theoretically unattractive. The present paper demonstrates that replacement of the special Phillips curve with one of several more plausible specifications overturns the instability result, whether or not the IS equation is replaced with a forward-looking version. Thus the instability result is quite fragile and therefore provides almost no basis for a negative judgment regarding nominal income targeting.
G97/5
Testing the rationality of the national bank of New Zealand's survey data
We test the rationality of the National Bank of New Zealand's survey data of inflation expectations. We cannot reject the null hypotheses of unbiasedness, efficiency, and orthogonality for a sample from 1985Q1 to 1996Q4. The survey's predictive power is better than those of the random walk and ARIMA models. During the period 1992q1-1996q1, where inflation is low and stable, the predictive power of an ARIMA model is better than that of the survey data, and the predictive power of the survey data is as good as that of the random walk model. These results are not inconsistent with rationality.
G97/4
Current account and exchange rate behaviour under inflation targeting in a small open economy
A model of a small open economy is used to analyse the behaviour of the current account and the real exchange rate in a regime of inflation targeting a la New Zealand. The steady state and the dynamic behaviour of the economy under various shocks are discussed.
G97/3
Efficient rules for monetary policy
This paper defines an efficient rule for monetary policy as one that minimises a weighted sum of output variance and inflation variance. It derives several results about the efficiency of alternative rules in a simple macroeconomic model. First, efficient rules can be expressed as "Taylor rules" in which interest rates respond to output and inflation. But the coefficients in efficient Taylor rules differ from the coefficients that fit actual policy in the United States. Second, inflation targets are efficient. Indeed, the set of efficient rules is equivalent to the set of inflation-target policies with different speeds of adjustment. Finally, nominal-income targets are not merely inefficient, but disastrous: they imply that output and inflation have infinite variances.
G97/2
The inflation-output trade-off: Is the Phillips Curve symmetric? A policy lesson from New Zealand
New Zealand data show that the inflation-output relationship is asymmetric. This asymmetry implies that positive demand shocks tend to increase inflation by more than negative demand shocks of similar magnitudes reduce it. An important implication of this asymmetry is that a monetary authority with the objective of maintaining the inflation rate within a narrow band needs to react more promptly to demand shocks than otherwise be necessary. Alternatively, policy that is slow to respond to demand disturbances will result in higher inflation, and greater losses of output than would be the case with a linear Phillips curve.
G97/1
A measure of monetary conditions
This paper explains why the overall stance of monetary policy is effected by both interest rates and the exchange rate, and hence why a Monetary Conditions Indicator can provide useful information about the stance of policy. Three output gap equations estimated in this paper reveal that the real interest rate and the real exchange rate both affect excess demand but that the real interest rate is the more powerful and faster acting policy transmission channel.
Discussion paper correspondence can be directed to:
Economics Department
Reserve Bank of New Zealand
PO Box 2498
Wellington
New Zealand
