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A cobweb model of financial stability in New Zealand

Paul Bedford, Chris Bloor

Financial turbulence over the past two years has generated increased interest in the analysis of financial stability. However, such analysis often suffers from conceptual difficulties and a lack of measurability. This paper develops a ‘cobweb model’ for analysing financial stability in New Zealand. A key objective of this cobweb model is to depict the Reserve Bank of New Zealand’s assessment of financial stability in a single diagram that will enable better communication of the main risks facing New Zealand’s financial system. The results of this model are displayed using a cobweb-style diagram, with five dimensions constructed using a wide range of quantitative indicators, supplemented by expert judgement where necessary. It is anticipated that this cobweb diagram will become the focal point of the Reserve Bank’s Financial Stability Report.