Why we undertook this work
This research fills a critical gap in understanding the macroeconomic and fiscal impacts of quantitative easing (QE) in New Zealand, following the RBNZ’s first use of a Large Scale Asset Purchase (LSAP) programme during the COVID-19 crisis.
The work informs the Monetary Policy Committee’s ongoing risk assessment and policy development and also responds to increased interest in the balance sheet effects of additional monetary policy.
By rigorously evaluating the impacts of LSAPs and some additional policy options, this research supports the RBNZ’s commitment to readiness for future economic challenge.
Summary
This Analytical Note examines the macroeconomic and fiscal impacts of the RBNZ’s LSAP programme - New Zealand’s first experience with quantitative easing - implemented during the COVID-19 economic crisis.
Using a dynamic stochastic general equilibrium (DSGE) model calibrated to New Zealand’s economy, the authors assess how LSAPs affected output, inflation, and government debt, and compare these outcomes to some alternative policy scenarios.
The findings highlight important trade-offs for policymakers when choosing between additional monetary policy tools. LSAPs and negative interest rates have different transmission channels and balance sheet implications, and the optimal policy mix may depend on the specific economic context and operational constraints at the time.
Key findings
LSAPs supported output and inflation
The LSAP programme supported both output and inflation during the acute phase of the COVID-19 crisis. However, it did not meaningfully contribute to the subsequent rise or peak in inflation.
Limited fiscal impact overall
The LSAP programme had negligible effects on consolidated government debt. Central bank losses were largely offset by increased economic activity and associated tax revenues.
Policy alternatives may have delivered similar macroeconomic outcomes
A counterfactual scenario with moderately negative policy rates (down to -0.75%) could have delivered similar macroeconomic outcomes with lower government debt but was not operationally feasible during the crisis.
Distinct transmission channels
LSAPs impact on macroeconomic outcomes primarily worked by lowering long-term interest rates and depreciating the real exchange rate, boosting net exports and economic activity. In contrast, negative rates stimulate domestic demand.