Price Effects of Monetary Policy: The Case of a Small Open Economy of New Zealand

Shahnawaz Karim (), Minsoo Lee and Christopher Gan ()
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Shahnawaz Karim: National Center for Financial and Economic Information (NCFEI), Ministry of Finance, Riyadh-11177, Kingdom of Saudi Arabia
Christopher Gan: Commerce Division, PO Box 84, Lincoln University, Lincoln 7647, Canterbury, New Zealand

Economic Analysis and Policy, 2011, vol. 41, issue 3, 253-272

Abstract: This paper empirically examines the price effects of monetary policy shocks in New Zealand. Empirical analysis incorporates variables suggested by a hybrid New Open Economy Macroeconomic (NOEM) model, allowing both ‘producer and local currency pricing to market (PCP and LCP-PTM)’ activities of foreign exporters. Empirical findings indicate the absence of any price puzzle and show that New Zealand producer price index (PPI) responds more sluggishly than consumer price index (CPI) due to a restrictive domestic monetary stance; suggesting the differences between the exchange rate pass-through of monetary policy shocks to CPI and PPI resulting from exporters’ different pricing strategies.

Keywords: New Open Economy Macroeconomic model; Monetary transmission mechanism; Inflation targeting monetary policy; Exchange rate pass-through (search for similar items in EconPapers)
JEL-codes: E42 E52 F41 (search for similar items in EconPapers)
Date: 2011
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