Our monetary policy research is guided by our Monetary Policy Remit and centres around 6 broad research themes below:
- Inflation
- Forecasting and modelling
- Tools, transmission and communication
- Small open economy macroeconomics
- Labour market
- Monetary policy framework, strategy and coordination
A large part of our 2024-25 research agenda has been shaped by the findings from our most recent Review and Assessment of the Formulation and Implementation of Monetary Policy (RAFIMP) over the five years to 2022, which identified key areas where a better understanding of the economy is needed to improve monetary policy decision-making in the future. The topics highlighted below are not exhaustive, and not the only research being undertaken at the RBNZ.
See profiles of our Economics Directorate staff to find out our economists’ research interests.
We research the dynamics of various measures of inflation and inflation expectations, the demand-side and supply-side drivers of inflation, the impact of inflation on the economic and financial wellbeing of New Zealanders, and what drives inflation in the long run. Understanding the dynamics of inflation is crucial to achieving our mandate of price stability, and we are constantly upgrading our models and data-sources to ensure that we are relying on timely and accurate information. This is also noted in our recent RAFIMP, which emphasises the need to develop new data sources and insights into the drivers of inflation following the COVID-19 pandemic.
Selected areas of focus for 2024-25:
- Exploring the use of web-scraped price data to monitor inflation on a more timely basis, given CPI data is published only at a quarterly frequency in New Zealand.
- Analysing household and business survey data to gain new insights into inflation expectations and price- and wage-setting behaviour in New Zealand
- Estimating monetary policy passthrough to non-tradables inflation
- The resurgence of the New Zealand Phillips curve (PDF, 936KB)
- Decomposing supply and demand driven retail inflation in New Zealand
- A Bernanke-Blanchard model decomposition of New Zealand inflation: The pandemic and beyond
- Speech - Inflation: the road back to 2%
- Rational inattention to inflation among New Zealand households
- Great Expectations: performance of survey inflation expectations at improving model-based inflation forecasts
- Have the effects of monetary policy on inflation and economic activity in New Zealand changed over time?
Our monetary policy needs to be informed by best practice forecasting, empirical tools, and quantitative models. Monetary policy affects the economy with long and variable lags, with recent estimates suggesting it takes 18 months to about 2 years for the official cash rate (OCR) to have its peak impact on inflation (see November 2023 MPS, Chapter 4). Policymakers thus need to be forward-looking and base their decisions on an outlook of the future that is highly uncertain.
To inform our policy decisions, we rely heavily on economic forecasts constructed using various empirical and structural models that incorporate the latest data (McDermott, 2013). These models enable us to capture a complex set of information in formulating economic projections and provide a framework for assessing the impacts and trade-offs associated with different policy options. Continuously developing and improving our forecasting and modelling tools is an important dimension of our ongoing research.
Recent experience of macroeconomic volatility during the COVID-19 pandemic highlighted the importance of timely data and responsive forecasting techniques. Our 2024-25 research agenda includes a focus on developing new sources of data to enhance our ability to monitor the economy, emphasized as a priority in our most recent RAFIMP.
Selected areas of focus for 2024-25:
- Exploring the use of various high-frequency indicators for improving forecast performance
- Refining models of New Zealand house prices.
- Developing models to examine the macroeconomic impacts of climate change
- New Zealand House Prices and the Decline in Longer-Term Financing Costs
- Housing Supply, House Prices, and Monetary Policy
- Down to business: Which QSBO measures are the best at forecasting?
- Suite as! Augmenting the Reserve Bank’s output gap indicator suite
- Forecasting with a Global VAR model
- Quantifying fiscal multipliers in New Zealand: The evidence from SVAR models
Responding appropriately to evolving economic conditions requires an understanding of the mechanism through which monetary policy affects the economy and financial markets. We are continuously undertaking research to better understand these channels and the factors that may influence the speed or strength of monetary policy transmission.
During the COVID-19 pandemic, we used a range of additional monetary policy (AMP) tools in addition to the Official Cash Rate to combat economic instability and financial market volatility. These tools had never been used in New Zealand prior to the pandemic, and so research on their effectiveness over this period is crucial to prepare us for future shocks. Our most recent RAFIMP notes that AMP tools were effective in getting the financial system back to normal and highlights the importance of further developing the Reserve Bank’s capabilities and understanding of these policy tools.
Selected areas of focus for 2024-25:
- Understanding how monetary policy transmits to different financial market variables and interest rates
- Estimating the macroeconomic effects of large-scale asset purchase programmes in small open economies
- Developing new models to refine our estimates New Zealand’s neutral interest rate, the rate at which monetary policy is neither stimulative nor restrictive.
- Exploring how household indebtedness affects housing wealth effects and monetary policy transmission
- Transmission accomplished? Monetary policy pass-through to bank funding costs and mortgage rates
- Speech - Transmission of monetary policy to financial conditions
- The effects of the Funding for Lending Programme (FLP) on funding costs and mortgage rates
- Monetary Policy Easing and the Distribution of Wealth in New Zealand
- Monetary Policy Pass-Through to Mortgage Rates (PDF, 1.4MB)
- The household cash flow effects of low interest rates in New Zealand (PDF, 384KB)
- An overview of the distributional effects of monetary policy (PDF, 981KB)
- Have the effects of monetary policy on inflation and economic activity in New Zealand changed over time?
- How does monetary policy affect the New Zealand housing market through the credit channel?
We research New Zealand’s role in the global economy, drawing comparisons of economic conditions and monetary policy with other countries, and building our understanding of how global events – such as wars and geopolitical change – may impact the New Zealand economy. As a small open economy, our trade with international partners is an important driver of growth, and we are susceptible to external shocks. In particular, supply chain disruptions following the COVID-19 pandemic and Russia’s invasion of Ukraine contributed to inflationary pressures in New Zealand in recent years. Better understanding how supply shocks like pandemics, earthquakes, and climate change affect inflation is noted as a priority in our recent RAFIMP.
Selected areas of focus for 2024-25:
- Estimating the impact of supply shocks on inflation and output
- Assessing the degree and speed of exchange rate pass-through to prices in New Zealand
- Assessing the macroeconomic impacts of migration on New Zealand using empirical and micro-data approaches.
Understanding employment and wage dynamics and their effect on inflationary pressures is key to achieving our inflation mandate. Recent staff research (see Bayarmagnai and Jacob, 2024) indicates that labour shortages due to pandemic-related border restrictions were a significant driver of high inflation in New Zealand following the COVID-19 pandemic. Our latest RAFIMP highlights that labour market dynamics changed quickly through the pandemic and aftermath, contributing to inflationary pressure in the New Zealand economy. Further research is needed to enhance our ability to assess labour market conditions and their implications for inflation.
Selected areas of focus for 2024-25:
- Examining the predictive power of various labour market indicators for inflation
- Assessing the potential impacts of automation and artificial intelligence on New Zealand’s labour market
- Assessing and communicating labour market indicators of inflationary pressure (PDF, 5.7MB)
- What Matters for Job Finding and Separation in the long-run?
- Sectoral reallocation and income growth in the labour market during the COVID-19 pandemic
- Labour market cycles across different groups: What does history tell us? Part I: Theory, ethnicities
- Labour Market Cycles Across Different Groups: What Does History Tell Us? Part II: Age and Sex
- Labour market cycles across different groups: What does history tell us? Part III: Regions
- Monetary policy and regional unemployment
- Vacancies, unemployment and labour market slack in New Zealand
We are continuously undertaking research and analysis to evaluate the appropriateness of our monetary policy framework and targets and the costs and benefits of different monetary policy strategies under varying economic conditions. This research will help us better prepare for issues that will affect monetary policy in the future.
Our recent RAFIMP noted that ‘agile and nimble decision making’ was vital in responding to the COVID-19 pandemic. Research into monetary policy frameworks, strategy and coordination allows us to continuously refine our policy frameworks, analysis, and actions to support effective monetary policy decisions.
Selected areas of focus for 2024-25:
- Evaluating optimal monetary policy frameworks using model simulations
- Exploring the interaction between monetary policy, fiscal policy and the financial sector
- The Optimal Level of the Inflation Target (PDF, 1.15MB)
- The Measurement of Price Stability (PDF, 1.1MB)
- The 2022/2023 Remit Review