A comparison of the properties of NZM and FPS

Release date
01/03/2000
Reference
DP2000/02
Authors
Aaron Drew; Benjamin Hunt
The New Zealand Treasury and the Reserve Bank of New Zealand both maintain and use comprehensive macroeconomic models of the New Zealand economy: NZM and FPS respectively. In this paper, shocks are applied to the two models to illustrate and compare their dynamic properties. The most notable differences arise from their characterisations of the inflation process. In NZM, inflation is modelled as a cost-push phenomenon, whereas FPS models inflation as a demand pull process. Consequently, shocks arising from demand and cost sources often have quite different implications for monetary policy in the two models. In contrast, in general the long-run responses of the models to permanent shocks are quite similar, although the transition paths differ reflecting both the differing inflation processes and adjustment dynamics.