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NEW ZEALAND and INFLATION TRAGETING

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Title: NEW ZEALAND and INFLATION TRAGETING


1
NEW ZEALANDand INFLATION TRAGETING
James Mitchell Aurash Alavi Kungzhow Young
Christine Le
2
WHERE IS IT?
3
New Zealand
  • Population 4 million
  • Major languages English, Maori
  • NZ has 4 million people (14 per square km), 39.5
    million sheep (135 per square km) and 9 million
    cattle
  • Around 80 of meat produced is exported NZ
    supplies 54 of world exports of sheep meat.
  • NZ was the first western democracy to give women
    the vote
  • New Zealand has won more Olympic gold medals, per
    capita, than any other country.

4
New Zealand
  • Capital Wellington
  • Independence From the UK
  • September 26, 1907
  • Area 103,738 sq mi (about the size of
    Colorado)
  • GDP (PPP) 2005 estimate
  • - Total 101.685 billion USD (58th)
  • - Per capita 24,797 USD (27th)
  • HDI (2003) 0.933 (19th) high
  • Labor force - by occupation
  • agriculture 10
  • industry 25
  • services 65 (1995)
  • Unemployment rate 4 (2005 est.)

5
How is New Zealands Economy?
6
Macroeconomic Overview
  • New Zealand was a world leader in
  • economic growth from 1940 to the 1970s
  • By the early 1980s New Zealand faced a series of
    economic obstacles
  • New Zealands real GDP has increased from 91.6
    billion to 133.8 billion New Zealand dollars
    since 1993
  • GDP growth has outpaced population inflow,
    averaging 111.5 billion dollars over the past
    decade
  • While per capita GDP continues to rise, it is
    among the lowest of the highly developed
    economies

7
Central Bank of New Zealand
  • The Reserve Bank was established in 1934 and is
    wholly government owned. Its current governance
    arrangements and institutional purpose are
    defined in the Reserve Bank of New Zealand Act
    1989.
  • The Reserve Bank does not use committees,
    internal or external, to make formal decisions.
    The Bank has an extensive internal committee
    system which provides the Governor with detailed
    advice. However, under the Reserve Bank Act,
    authority is vested in the Governor, unlike many
    other central banks where decision-making
    authority is often vested with committees.

8
Some more facts
  • In mid-1984 New Zealand began a rapid process of
    economic deregulation and state sector reform. As
    part of this, a consensus emerged among
    policymakers that New Zealand needed to restore
    price stability.
  • In part, this reflected a growing realization
    that attempting to use stimulatory monetary
    policy to deliver faster sustainable economic
    growth would not work.
  • The dollar was floated in March 1985 and by
    ministerial direction monetary policy was
    switched to an exclusive focus on getting
    inflation down and then keeping it down.
  • This priority was passed into law with the
    passage of the Reserve Bank of New Zealand Act
    1989, which established the framework within
    which the Reserve Bank operates today

9
  • Mishkin(1999) discussed four monetary policy
    regimes
  • exchange rate targeting, e.g.
  • monetary aggregate targeting, e.g., Germany
    before the European monetary union and
    Switzerland
  • inflation targeting, e.g. New Zealand, UK,
    Canada
  • an eclectic approach, e.g. US under Greenspan

10
(No Transcript)
11
INFALTION TARGETING
12
Inflation Targeting
  • Elements
  • 1. Public announcement of medium-term
    inflation-target
  • 2. Institutional commitment to price stability
  • 3. Information inclusive strategy
  • 4. Increased transparency through public
    communication
  • 5. Increased accountability

13
Target range
  • Tradeoff between target accuracy vs. policy
    credibility and bias toward range ceiling
  • Converging economies range targets adopted when
    uncertainty is large (Chile 1991-94 Israel
    1995-98 Brazil), point targets adopted when
    aiming at strengthened policy credibility and
    avoidance of ceiling bias (Chile 1995-00, Israel
    1999, Hungary 1998-00)
  • Stationary economies range targets more
    frequent. All fall within 0-4 inflation
    interval.

14
Inflation Targeting range
15
List of countries adopting IT
16
INFALTION TARGETINGinNEW ZEALAND
17
Preconditions for IT
"it is sometimes suggested that inflation
targeting requires a sophisticated inflation
forecasting ability in the central bank, or a
sophisticated financial system, or a
sophisticated measure of inflation But when New
Zealand began inflation targeting in the
eighties, we had none of those things...
(Don Brash, Governor 1988-2002)
18
Inflation Targeting in NZ
  • New Zealand was the first country in the world to
    introduce an explicit target for inflation, after
    the Reserve Bank Act was passed in 1989. The Act
    also introduced an entirely new institutional
    framework for monetary policy.
  • New Zealands central banking legislation, the
    Reserve Bank of New Zealand Act 1989, has
    attracted world-wide interest.
  • Since 1989 many central banks around the world
    have joined the inflation targeting club, and
    none has left. There are more than 20 inflation
    targeting countries and the number is likely to
    increase

19
Institutional characteristics of the NZ approach
  • Standard characteristics
  • An independent Central Bank (Reserve Bank Act
    1989)
  • 5 year term for Governor
  • 5 year funding agreement with Government
  • Explicit inflation target
  • Price stability the legislated goal for Monetary
    Policy
  • Inflation target specified in contract between
    Minister and Governor (PTA)
  • Accountability structures
  • Board monitors performance of Governor -
    continuous
  • Parliament annual report and quarterly reviews
    of policy statements
  • Markets and public quarterly policy statements

20
Institutional characteristics of the NZ approach
  • Non standard characteristics
  • Single decision maker the Governor
  • Advice from internal advisory group of governors
    and senior staff not the Board
  • Role of Board is purely monitoring
  • Can recommend dismissal of governor for
    non-performance
  • High level of forecast disclosure
  • Detailed quarterly forecasts including interest
    and exchange rate forecasts

21
Institutional structure of IT in NZ
Reserve Bank
22
  • Strict IT
  • Target 0 - 2
  • Caveats for shocks
  • Short policy horizon
  • Policy emphasis on exch rate rather interest
    rates
  • Flexible IT
  • Target 0 - 3
  • No explicit caveats
  • Policy emphasis shifting from exch rate to
    interest rate
  • Target 1 - 3
  • On average over medium term
  • Avoid unnecessary volatility in output, exch
    rate, int rate

23
Monetary policy
Issue 1
24
Pre-inflation targeting (1975 1990)Average
inflation 12.4Standard deviation 4.6
25
Post price stability(1992 2006)Average
inflation 2.2Standard deviation 0.7
26
Pre-inflation targeting (1975 1990)Average GDP
Growth 1.5Standard deviation 2.8
27
Post price stability(1992 2006)Average GDP
Growth 3.4Standard deviation 2.0
28
But Inflation targeting was part of a wider
economic reform program in the late 1980s early
1990s
  • Inflation targeting Reserve Bank Act (1989)
  • Financial sector liberalisation (1984-1985)
  • Fiscal reform Fiscal Responsibility Act (1994)
  • Reform of broader public sector management
    State Sector Act(1988), State Owned Enterprises
    Act(1986)
  • Labour market reform Employment Contracts Act
    (1991)
  • Privatisation of state trading enterprises eg
    Telecoms, Energy
  • Trade liberalisation

29
Inflation Targeting in New Zealand, Canada, and
the UK
30
INFLATION TARGETING
  • Advantages
  • The ultimate goal of monetary policy is clearly
    stressed
  • Transparent as inflation rate is known to the
    public
  • Meeting the targets raises credibility, and
    stabilizes inflation expectations
  • Inflation forecasts are based on a multitude of
    indicators (money and credit, interest rate
    spreads, business survey data, labor market
    conditions and wage rates, development in output
    markets), large information base

31
INFLATION TARGETING
  • Disadvantages
  • Time lags of monetary policy impulses on
    inflation require relying on inflation forecasts
  • These are conditional forecasts ? lack of
    transparency
  • Forecasts are based on developments in the real
    economy
  • Neglect of longer-run monetary developments and
    their impact on asset prices
  • Transmission channels of monetary policy have to
    be known for inflation forecasting
  • High inflation rates are generally associated
    with high levels of inflation variability such
    that inflation goals are missed frequently

32
  • Thank you!
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