Measuring Uncertainty and Its Impact on a Small Open Economy

Lucy Greig, Amy Rice, Tugrul Vehbi () and Benjamin Wong

Australian Economic Review, 2018, vol. 51, issue 1, 87-98

Abstract: We study the effect of uncertainty in New Zealand, a small open economy, by considering global and New Zealand†specific uncertainty proxies, including several US†and global†centric measures and two novel New Zealand†specific uncertainty proxies constructed using surveys of New Zealand firms and professional forecasters. We study the effect of uncertainty on a set of New Zealand macroeconomic variables. While all of the uncertainty proxies contain valuable information to understand macroeconomic fluctuations in New Zealand, a simple SVAR analysis suggests that global uncertainty is more important than domestic uncertainty in driving the New Zealand business cycle. The implications of uncertainty for monetary policy largely depend on how heightened uncertainty interacts with monetary policy objectives.

Date: 2018
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