The impact of monetary policy on New Zealand business cycles and inflation variability

Robert Buckle (), Kunhong Kim () and Nathan McLellan ()

No 03/09, Treasury Working Paper Series from New Zealand Treasury

Abstract: This paper uses the open economy structural VAR model developed in Buckle, Kim, Kirkham, McLellan and Sharma (2002) to evaluate the impact of monetary policy on New Zealand business cycles and inflation variability and the output/ inflation variance trade-off. The model includes a forward- looking Taylor Rule to identify monetary policy and the impact of monetary policy is evaluated by deriving a monetary policy index using a procedure suggested by Dungey and Pagan (2000). Monetary policy has generally been counter-cyclical, thereby reducing business cycles and inflation variability. Exceptions are in 1993 when monetary policy accentuated the business cycle upswing and in 1998 when monetary policy accentuated the recession, although its impact in 1998 was small relative to the impact of adverse climatic conditions. During the initial years of inflation targeting monetary policy tended to simultaneously reduce inflation and output variability. From 1996 to 2001 monetary policy was less effective in reducing inflation and output variability. This latter period included a brief experiment with a Monetary Conditions Index, the Asian crisis and a large adverse domestic climate shock.

Keywords: Monetary policy; inflation targeting, business cycles; open economy; structural VAR models; inflation, interest rates, exchange rates, climate; international linkages (search for similar items in EconPapers)
JEL-codes: C22 E32 E52 E58 E65 F41 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2003-03
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Working Paper: The impact of monetary policy on New Zealand business cycles and inflation variability (2004)
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