VARIABLE GSTl A TOOL FOR MONETARY POLICY IN NEW ZEALAND?

Iris Claus () and Brandon Sloan

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: To help maintain price stability in New Zealand a countercyclical use of the goods and services tax (GST) has been proposed. This paper argues that a variable GST rate is unlikely to be a useful stabilisation tool for monetary policy. It first discusses some of the problems that would arise with the implementation of a variable GST rate. It then develops a stylised model of the New Zealand economy to assess the effects of using a variable GST rate as a monetary policy tool relative to the conventional instrument, an interest rate. The results show that a variable GST rate would be less effective in dampening business cycles than an interest rate. It would lead to larger adjustments in the policy instrument and fluctuations in the real economy and inflation. Moreover, a variable GST rate would produce greater welfare losses from monetary policy than an interest rate tool.

JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2008-09
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2008-30

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