A cobweb model of financial stability in New Zealand

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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.