The RBNZ's economic model

The Reserve Bank’s economic model is intended to illustrate how our economy works and provide a framework for the Bank’s economists to think about what is happening within it and where the economy, and inflation, may be heading next. It shows the total amount of goods and services produced in our economy, or our Gross Domestic Product.
 Click on each of the model components below to see the kind of questions economists ask when working with the Bank’s economic model. (A box will appear beneath the model).
OCR DIAL RESERVE BANK OF NZ BANKS HOUSEHOLDS LOCAL GOODS & SERVICES (Non-tradeable output) BUSINESSES LOANS FROM THE REST OF THE WORLD NEW ZEALAND DOLLAR EXPORTS GOVERNMENT SPENDING INVESTMENT HOUSEHOLD SPENDING IMPORTS FOREIGN GOODS AND SERVICES - (Tradeable output)
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Household spending

What if consumers become nervous about economic developments happening in Europe or the US? What would it mean for our economy?
What if consumers find the value of their homes has increased – how might that affect their spending habits?

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Foreign goods and services (tradeable output)

Our economy also produces and consumes goods and services from the rest of the world. This includes things like buying things online from overseas and tourists spending their money in New Zealand. International transactions affect our current account (our transactions with the rest of the world). Important questions in this area include – are we earning enough in foreign currency to pay for the foreign goods we as a country buy? Which products and which countries do we export to? Which countries and which products do we import from?

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Imports

What if the price of imported goods dropped significantly – how might that affect the companies in New Zealand that make goods we can also buy from overseas, and what impact would that have on our economy?

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Household spending

What if consumers become nervous about economic developments happening in Europe or the US? What would it mean for our economy?

What if consumers find the value of their homes has increased – how might that affect their spending habits?

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Investment

If businesses are nervous that interest rates could go up in the near future and therefore the cost of borrowing money increases, how much is that likely to affect whether they take on more staff, or grow their businesses?

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Government Spending

How would the economy be affected if the Government started spending more? Or if the Government decreased or increased taxes?

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Exports

What would happen if the amount of dairy products we export increased or decreased sharply due to poor weather conditions? What would that mean for our economy?

How does the outlook for the Chinese economy affect international dairy prices and our terms of trade?

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The New Zealand Dollar

What caused the NZ dollar to move? Was it related to something happening in the rest of the world, or something that happened in NZ? How does the change in the NZ dollar affect the export sector? What is the impact on prices and inflation?

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Local goods and services

How would our economy be affected if less people started going to University, the cost of medicines increased dramatically, or if people stopped shopping in stores and bought more online?

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Businesses

Should I increase or decrease production? How? By hiring more staff, or investing in more plant and machinery?

Should I change my prices? What will happen to demand, revenue, profits?

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Loans from the rest of the world

How would our economy be affected if our external debt (the amount of money the country as a whole owes to lenders overseas) became especially large?

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Households

What happens if mortgage costs increase – how might households change their behaviour because of this? And what if house prices were to plummet, what would this mean for the economy?

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Banks

What’s happening with floating and fixed mortgage rates? What’s happening with bank lending to the business sector, to the rural sector? How easy is it for banks to borrow funds from the rest of the world?

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Reserve Bank of New Zealand

How fast is the economy likely to grow over the near future and are inflation pressures rising or falling? How would this economic and inflationary outlook change if the Reserve Bank was to increase the Official Cash Rate – and thereby the cost of borrowing money? Or decrease the Official Cash Rate?

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The OCR dial

It takes time for changes in interest rates to have their full effect. So where does the Reserve Bank think inflation might be in one or two years’ time, and which way, and how much, should it turn the OCR dial today to keep the prices and cost of living stable in NZ.

Economists feed data and other information into the model and then use their economic judgement and experience to consider how different parts of the economy might be affected in various scenarios. For example, if households start saving more, or businesses start investing less.

The information it produces feeds into the Bank’s economic forecasts and monetary policy decisions. It is also used in carrying out research.

The Official Cash Rate dial is the Reserve Bank’s tool for affecting the cost of borrowing money in New Zealand. It turns this up or down to help keep prices within the economy stable.

*This is a simplified and stylised depiction of the Reserve Bank’s economic model. It is not a fully accurate representation of the elements and connections included in the model.