We estimate the macroeconomic effects of changes in commodity prices on the New Zealand
economy. Our analysis suggests that an increase in commodity prices has similar characteristics
to demand driven macroeconomic fluctuations. GDP expenditure subcomponents such
as consumption and investment tend to rise in response to higher commodity prices. Business
investment appears to respond more than consumption, highlighting its importance in the transmission
of a commodity price movements. In line with higher demand pressures, non-tradable
inflation is estimated to increase persistently. We find that the real exchange rate appreciates,
and tradable inflation decreases accordingly. Possibly due to the divergent patterns of tradable
and non-tradable inflation, the interest rate does not respond to higher commodity prices in the
very short-run but is estimated to increase over longer horizons.