Reserve Bank of New Zealand Bulletin articles
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September 2008 (Vol. 71, no 3)
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Articles
Editor’s Note (PDF 133KB)
Flexibility and the limits to inflation targeting (PDF 142KB)
This article reproduces the paper for a speech given by Governor Alan Bollard on 30 July 2008. We argue that New Zealand’s flexible inflation-targeting framework serves the economy well, but one should not to ask too much of it. Inflation targeting is the best approach New Zealand and many other similar countries have yet found for monetary policy, among a limited number of viable alternatives. The fact remains that the New Zealand economy is subject to powerful forces, and monetary policy can only do so much to buffer the shocks. When shocks are persistent, as with oil and food prices currently, it is difficult to judge the appropriate response. Monetary policy needs to allow the initial price changes to occur, but be firm enough to ensure that generalised second-round inflation effects do not take hold. The clear medium-term objective of 1-3 percent inflation helps to anchor inflation expectations, and gives us more scope to accommodate short-term inflation shocks while ensuring that the price stability objective is not undermined in the process.
Inflation in New Zealand’s trading partner economies (PDF 260KB)
Inflation pressures in other economies have important implications for inflation, activity and monetary policy in New Zealand. This article examines inflation trends in New Zealand’s trading partner economies over the past decade. Looking at a range of inflation measures, we observe that the low inflation seen in our trading partner economies in the mid-1990s has now given way to a period of higher inflation. Increases in inflation rates have been seen in all regions, with particularly notable increases in Asian economies. Higher inflation in our trading partner economies has been related to strength in global growth and the closer integration of Asia and emerging markets into the global economy. These developments have contributed to increased demands on productive resources and strong growth in commodity prices. Such increases have been reflected in higher consumer prices and export prices in our trading partner economies. In New Zealand, these developments have contributed to a more challenging environment for monetary policy, with stronger consumer price inflation and increased headwinds for growth.
The costs of inflation – what have we learned? (PDF 124KB)
This article reviews what we know about the long-run impact of inflation on economic growth. Economic theory tells us that both high inflation and deflation adversely affect the economy. Inflation tends to benefit the wealthy at the expense of the poor and those on fixed incomes and it reduces economic growth over the long term. The experiences of New Zealand and other industrialised countries since World War II generally support this negative long-term relationship between inflation and growth. The experience of Japan illustrates the negative impact of deflation. There is general agreement that both high inflation and deflation impact negatively on the economy. Recent empirical studies have estimated the level of inflation at which its long-run impact on growth becomes materially negative. For industrialized countries, this level is about 3 percent, while for developing countries it is around 11 to 12 percent.
Events precede ideas: Bob Gordon on macroeconomics (PDF 100KB)
Professor Robert J. Gordon, the well-known macroeconomist, visited New Zealand recently to speak at the international conference “Markets and Models: Policy Frontiers in the AWH Phillips Tradition” held from 9 to 11 July 2008. Professor Gordon is Stanley G. Harris Professor in the Social Sciences and Professor of Economics at Northwestern University in Illinois, USA. He has written extensively on the topics of productivity, price indices and the Phillips curve. He served on the US Boskin Commission in 1995-96, which assessed the accuracy of the US Consumer Price Index. We caught up with Professor Gordon for a chat about macroeconomics and some of the challenges facing monetary policy.
Financial turmoil and global imbalances: the end of Bretton Woods II? (PDF 153KB)
Since August 2007, the global economy has been subject to a sharp and adverse financial shock, with re-pricing of risk and higher cost of funds. This article argues that this shock is a consequence of an unsustainable period of global economic growth involving very large external imbalances. These imbalances – large current account surpluses in many emerging markets matched by current account deficits (CADs) in a number of advanced economies – contributed to an unsustainable cheapening of credit and increased risk-seeking behaviour by financial markets. The development of the imbalances can be explained by financial underdevelopment in many emerging markets, together with particular savings and investment dynamics across the surplus and deficit countries. These factors established ‘Bretton Woods II’, a global macro-financial dynamic that tied the deficit and surplus economies together in a co-dependent relationship. The current credit crisis appears to mark the limits of this relationship. However, the precise nature of any subsequent adjustment in global imbalances is not immediately clear.
A user’s guide to credit ratings (PDF 76KB)
This article explains how credit ratings can be used by individual investors to make informed investment decisions, and the benefits of credit ratings to the financial system. A credit rating is an independent assessment of the financial capability and willingness of an entity to meet its financial obligations as they fall due (i.e., its creditworthiness). The obligation to disclose credit ratings has been a feature of New Zealand’s prudential supervision of registered banks since 1996. It became mandatory for all banks to have a credit rating from an approved rating agency in 2002. Similar obligations have been introduced for most non-bank deposit takers, and Cabinet has recently decided to require all insurers (not just disaster and property insurers) to obtain credit ratings in the future. Credit ratings play a useful role in encouraging sound management of financial institutions and in supporting market participants’ ability to make informed choices about credit risk. Notwithstanding these benefits, and the usefulness to investors of credit ratings as a simple measure of credit risk, investors need also to be aware of the limitations of ratings. We highlight some of the key issues that investors should consider when using ratings as a tool in their decision making.
The views expressed are those of individual authors and do not necessarily reflect official positions of the Reserve Bank of New Zealand. Articles published in this Bulletin may not be wholly or substantially reproduced without the permission of the Reserve Bank of New Zealand. Data, brief extracts from articles, and other material appearing in the Bulletin, may be used without restriction provided due acknowledgement is made of the source.
