Recent Reserve Bank discussion papers (with abstracts)
Reserve Bank discussion and research papers present the detailed scholarly research of staff economists and visiting scholars. The papers are published throughout the year mainly for academic and professional economists.
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Papers for 2009
DP2009/12
A Quarterly Post-World War II Real GDP Series for New Zealand
There are no official quarterly real GDP estimates for New Zealand, for the period prior to 1977. We report the development of a seasonally adjusted series for a period of more than 60 years from mid-1947, and evaluate statistical properties. The series were developed by linking quarterly observations from two recent official series to temporally disaggregated observations for an earlier time period. Annual real GDP series are disaggregated, using the information from two quarterly diffusion indexes, developed by Haywood and Campbell (1976). Three econometric models are used: the Chow and Lin (1971) model that disaggregates the level of GDP; and the Fernández (1981) and Litterman (1983) models that disaggregate changes in GDP. Our preferred quarterly series is based on results generated from the Chow-Lin model. We assess movements in the new series against qualitative findings from New Zealand’s post-WWII economic history.
DP2009/11
A cobweb model of financial stability in New Zealand
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.
DP2009/10
A theoretical foundation for the Nelson and Siegel class of yield curve models
This article establishes that most models within the popular and widely used Nelson and Siegel (1987, hereafter NS) class, with one notable exception being the Svensson (1995) variant, are effectively reduced-form representations of the generic Gaussian affine term structure model outlined in Dai and Singleton (2002). That fundamental theoretical foundation provides a compelling case for applying certain NS models as standard tools for yield curve analysis in economics and finance: users get the well-established pragmatic benefits of NS models along with an assurance that they correspond to a well-accepted set of principles and assumptions for modelling the yield curve and its dynamics.
DP2009/09
Entrepreneurship and aggregate merchandise trade growth in New Zealand
We present a descriptive analysis of firm-level merchandise trade, focussing on the role of entrepreneurial exporting behaviour. We document two aspects of the dynamics of trade – the contribution of novel export activity to aggregate trade growth and, conversely, the substantial exit rates of new trade relationships. The unique contribution of this paper lies in the detailed and comprehensive data we have available on market and product choices. Specifically, we make use of shipment-level goods trade data, linked to information for the universe of economically active New Zealand manufacturers,to examine trade at the firm-level and at the product-country-firm nexus. Our growth decomposition and survival analysis suggest several themes: (a) novel market entry is a significant contributor to aggregate export growth; (b) the study of international entrepreneurial behaviour should encompass not just de novo entrants, but the broad range of trade innovations initiated by incumbent exporters; (c) much expansion in trade appears to be incremental in nature; (d) despite this, such innovations appear to be inherently risky; and (e) experience and scale appear to be key factors in overcoming these risks (or at least proxies for such factors).
DP2009/08
Evaluating a monetary business cycle model with unemployment for the euro area
This paper estimates a medium-scale DSGE model with search unemployment by matching model and data spectra. Price markup shocks emerge as the main source of business-cycle fluctuations in the euro area. Key for the propagation of these disturbances are a high degree of inflation ndexation and a persistent response of monetary policy to deviations of inflation from the target.
DP2009/07
Developing stratified housing price measures for New Zealand
Widely used measures of growth in mean or median housing prices will reflect changes in the composition of dwellings sold as well as changes in demand and supply conditions. Using a suburb-level dataset from the Real Estate Institute of New Zealand we use stratification techniques to adjust for compositional change and derive a timely and robust measure of housing prices for New Zealand. Results suggest this stratified measure produces estimates of housing price inflation that accord closely with the accurate but less timely figures obtained from the QV Quarterly House Price Index.
DP2009/06
Analysing wage and price dynamics in New Zealand
This paper examines the relationship between wages and consumer prices in New Zealand over the last 15 years. Reflecting the open nature of the New Zealand economy, the headline CPI is disaggregated into non-tradable and tradable prices. We find that there is a joint causality between wages and disaggregate inflation. An increase in wage inflation forecasts an increase in non-tradable inflation. However, it is tradable inflation that drives wage inflation. While exogenous shocks to wages do not help to forecast inflation, the leading relationship from wages to non-tradable inflation implies that monitoring wages may prove useful for projecting the impact of other shocks on future inflation.
DP2009/05
Using wavelets to measure core inflation: the case in New Zealand
This paper uses wavelets to develop a core inflation measure for inflation targeting central banks. The analysis is applied to the case of New Zealand – the country with the longest history of explicit inflation targeting. We compare the performance of our proposed measure against some popular alternatives. Our measure does well at identifying a reliable medium-term trend in inflation. It also has comparable forecasting performance to standard benchmarks.
DP2009/04
Forecasting national activity using lots of international predictors: an application to New Zealand
We apply “data-rich” factor and shrinkage methods to understand how large international datasets can be used to improve forecasts of New Zealand GDP. We find that exploiting a large number of international predictors can improve forecasts compared to more traditional models based on small datasets. This is in spite of New Zealand survey data capturing a substantial proportion of the predictive information in the international data. The largest forecasting accuracy gains from including international predictors are at longer forecast horizons. The forecasting performance achievable with the data-rich methods differs widely, with shrinkage methods and partial least squares performing best. We also assess the type of international data that contains the most predictive information for New Zealand growth over our sample.
DP2009/03
Order flow and exchange rate changes: A look at the NZD/USD and AUD/USD
In this paper, we apply a series of empirical microstructure tests to the NZD/USD and AUD/USD. In contrast to a more traditional macro approach to explaining exchange rate changes, microstructure studies focus on the role that transactions play in helping the market aggregate information on individual market participants expectations of economic fundamentals and risk preferences. Our data comes from the Reuters Spot Matching service, the main interbank trading platform in both currency pairs, and covers almost five and a half years of transactions from January 2001 to March 2006, a much longer and more representative time series than many empirical microstructure applications to date. We find that there is a strong contemporaneous relationship between net order flow (the net of buyerinitiated and seller-initiated transactions) and changes in the NZD/USD and AUD/USD at frequencies from one minute to one week, similar to studies on other currencies. We also find that cross-currency order flow has a positive association with changes in the other exchange rate (ie AUD/USD order flow has a positive contemporaneous relationship with changes in the NZD/USD). Finally, we examine a wide range of New Zealand, Australian and US data releases and central bank interest rate decisions and find that order flow plays an important role in communicating different interpretations of macroeconomic news.
DP2009/02
Real-time conditional forecasts with Bayesian VARs: An application to New Zealand
We develop a large Bayesian VAR (BVAR) model of the New Zealand economy that incorporates the conditional forecasting estimation techniques of Waggoner and Zha (1999). We examine the real-time forecasting performance as the size of the model increases using an unbalanced data panel. In a realtime out-of-sample forecasting exercise, we find that our BVAR methodology outperforms univariate and VAR benchmarks, and produces comparable forecast accuracy to the judgementally-adjusted forecasts produced internally at the Reserve Bank of New Zealand. We analyse forecast performance and find that, while there are trade offs across different variables, a 35 variable BVAR generally performs better than 8, 13, or 50 variable specifications for our dataset. Finally, we demonstrate techniques for imposing judgement and for forming a semi-structural interpretation of the BVAR forecasts.
DP2009/01
Revealing monetary policy preferences
This paper uses multiple criteria decision making, also termed conjoint analysis,to reveal the preferences of central bank policy-makers at the Reserve Bank of New Zealand. Guided by the Policy Targets Agreement between the Governor of the Reserve Bank and the Minister of Finance, we identify policy-makers’ willingness to trade off inflation outcomes for reductions in volatility in GDP, the exchange rate, and interest rates. Using 1000Minds software, policy-makers are presented with a sequence of pairwise choices that ultimately quantify which macroeconomic attributes are most important to them. The paper also distinguishes between the preferences of senior management, and a broader cross-section of economists and other staff.
Discussion paper correspondence can be directed to:
Economics Department
Reserve Bank of New
Zealand
PO Box 2498
Wellington
New Zealand
