Policy assessment considerations

Your goal

As part of the Reserve Bank of New Zealand (RBNZ) Monetary Policy Challenge your team is required to make a monetary policy decision on the Official Cash Rate (OCR) and to explain and justify this decision in a 10 minute presentation on monetary policy.

Your presentation should be based on the topics covered in chapters three and four of the Monetary Policy Statement. It should provide an analysis of current economic activity in the New Zealand economy and link this back to inflationary pressures. Your policy decision should be consistent with achieving the medium term inflation target as set out in the current Policy Targets Agreement.

This information provides a basic guide to setting out the analysis in your presentation and identifies some key areas that you should include. You are not required to follow this precisely, judges will award marks for originality so structure your presentation in the way you think best supports your decision. However, there are a few very important points to note:

• Prepare your presentation in Microsoft PowerPoint. Please include the name of your school on the first slide of your presentation and in the file name.
• Keep to the time limit (10 minutes). Practice your presentation, including ways to wrap up once you reach 10 minutes.
• Use plain language. Be clear and concise. This way your argument will be properly followed and understood. Remember to proof read your slides.
• The judges are interested in the accuracy and logic of your overall reasoning rather than your ability to correctly ‘guess' the Reserve Bank's decision.

Structuring your presentation

Decision

Present your decision at the beginning of your presentation. This indicates to the judges the position you intend to justify during your presentation:

e.g. "The Official Cash Rate (OCR) will remain unchanged at 7.25 percent."

Reserve Bank of New Zealand: Monetary Policy Statement, September 2006

Key policy outlook

In this section present your view of current economic activity and expectations of future behaviour in order to justify your decision. Focus on activity in key sectors of the economy. It is important to think about the link between activity in these sectors and ultimately how this relates back to overall inflationary pressures.

There is limited time to present your argument so focus on providing an overview of behaviour in the economy, concentrating on the sectors most relevant to your decision. Remember because monetary policy operates with delay, your analysis should seek to be forward looking.

Some general considerations:

• Recall the key components of growth in the economy: on the demand side it is helpful to consider the components of expenditure GDP (Y = C + I + G + X – M) and on the supply side consider the factors that affect firms' production (i.e. oil prices, technology, wages etc)
• How and why do these sectors of the economy influence overall activity and inflation?
• Are any sectors of the economy growing particularly strongly (or weakening)? How do these relate to each other and what is the relative importance of each sector?
• What is the likely impact of this on the outlook for inflation?
• Use appropriate data, news reports and events to justify your conclusions:
  • What does this data suggest about current activity - how does this compare to activity in the past?
  • What do you expect may happen in the next period(s)? Why? (Judges do not require exact forecasts, but it is useful to provide a general indication of expected future activity.)

Inflation outlook

Remember the aim of monetary policy is to maintain price stability. You should sum up your presentation by linking your view of the economy back to how you expect inflation to change over the next 18 – 24 months and indicate why this makes your policy decision appropriate.

One way of thinking about inflationary pressures in the economy is through the output gap:

• Actual GDP reflects demand in an economy, and is determined by the equation for expenditure GDP (as above)
• Potential GDP reflects the supply side of an economy, or the quantity and quality of an economy's productive assets
• The output gap is the difference between actual and potential GDP. When actual GDP is above potential we tend to see strong inflationary pressures as demand is exceeding the supply capacity of the economy.

Use of information sources

Use of data and charts

Analysis and conclusions should be supported with evidence from Reserve Bank or external data sources.

Appropriate charts can aid your decision and help to communicate your ideas. However it is important to discuss any charts you include and they should be well labelled and fully referenced.

Economic indicators and data sources

You are encouraged to consider a range of sources including (but not limited to) newspapers, private banks (e.g. Westpac, ANZ), and public sector organisations. However, remember that RBNZ economists are likely to have seen this information before, and will recognise it if you use the analysis directly.

Two particularly valuable sources are:

• Statistics New Zealand
• Reserve Bank of New Zealand

Examples of indicators you may like to consider are detailed in the Forecasting page

Other resources

The team resources section provides valuable information on Forecasting (including further information on the output gap), the Economy and Inflation.

Also read the Judging criteria - this will tell you what the judges are looking for.

Read the official Monetary Policy Statements.

Remember that this is just a guide to help you get started – there are many different ways to present your ideas. It is important to use chapters three and four of the Monetary Policy Statement as a reference and also make use of all the additional material provided to assist you by the Monetary Policy Challenge.