The role of the Reserve Bank's macro model in the formation of interest rate projections
The Reserve Bank of New Zealand is relatively unique in that our macroeconomic projections include a variable nominal interest rate path over the projection period. This approach is different from the constant nominal interest rate assumption used by most other central banks. In New Zealand, the interest rate projection is produced using a combination of the Bank's core macroeconomic model and policy-maker judgement. The model increases projected short-term interest rates when inflation is projected to be persistently high relative to target, and lowers interest rates when inflation is projected to be persistently low relative to target. In this sense, model projections are referred to as endogenous interest rate projections. This article explains the rationale for endogenous interest rate projections and why the Reserve Bank has adopted this approach.