Measuring uncertainty and its impact on the New Zealand economy
As a small open economy, New Zealand is constantly affected by the global macroeconomic environment. Therefore, one should expect uncertainty in the global macroeconomic environment to have an impact on the New Zealand economy. Exogenous domestic events, such as earthquakes, cyclones, and droughts also affect domestic New Zealand uncertainty, as do more-endogenous developments, such as those associated with the political system.
This Note explores the effect of uncertainty on the New Zealand economy, considering both the uncertainty originating from overseas and that which is specific to New Zealand. As no measures currently exist to measure the latter, we construct two New Zealand-specific uncertainty proxies. The first takes forecast disagreements from the Consensus Forecasts survey, while the second looks at the divergence between expected and experienced business conditions reported in NZIER’s Quarterly Survey of Business Opinion. To capture uncertainty originating from overseas, we consider a range of existing US/global uncertainty proxies.
We use these proxies to study the effect of uncertainty on a set of New Zealand macroeconomic variables. We find that an exogenous increase in proxies of both domestic and global uncertainty is followed by statistically significant falls in output, consumption, and investment. We find that the impact on investment is significantly larger than the impact on consumption. While all of the considered uncertainty proxies contain valuable information for understanding macroeconomic fluctuations in New Zealand, our results suggest that global uncertainty has been relatively more important than domestic uncertainty in driving the New Zealand business cycle over our sample period.
Our work and the wider academic literature have shown that uncertainty can have a non-trivial role in driving business cycle fluctuations. While this work represents a first serious attempt to develop uncertainty proxies for New Zealand, recent advances within the uncertainty literature provide promising avenues for future extensions.