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The changing transmission mechanism of New Zealand monetary policy

Rishab Sethi

This is the second of two Bulletin articles on the transmission mechanism of New Zealand monetary policy. In the first article (Drew and Sethi 2007), we described this mechanism, detailing the process by which changes in the Reserve Bank’s primary monetary policy instrument, the Official Cash Rate (OCR), eventually influence the general level of prices. This article examines how certain aspects of the transmission mechanism have changed over time. Assessing these changes is especially topical given that, in the estimation of some commentators, the most recent period of monetary tightening has witnessed policy that has been less effective at dampening inflation than previously. We briefly review the case for these claims and catalogue evidence from several sources to show that the overall impact of monetary policy on activity and inflation has not obviously weakened, and that some intermediate links in the mechanism may have, in fact, strengthened over the past decade.