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Information about NEW ZEALAND

Published on April 22, 2008

Author: Diana


NEW ZEALAND and INFLATION TRAGETING :  NEW ZEALAND and INFLATION TRAGETING James Mitchell Aurash Alavi Kungzhow Young Christine Le WHERE IS IT?:  WHERE IS IT? New Zealand:  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. New Zealand:  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.) How is New Zealand’s Economy?:  How is New Zealand’s Economy? Macroeconomic Overview:  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 Zealand’s 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 Central Bank of New Zealand:  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. Some more facts: :  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 Slide9:  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 INFALTION TARGETING :  INFALTION TARGETING Inflation Targeting: :  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 Slide13:  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. Target range Inflation Targeting range::  Inflation Targeting range: List of countries adopting IT::  List of countries adopting IT: INFALTION TARGETING in NEW ZEALAND:  INFALTION TARGETING in NEW ZEALAND Preconditions for IT:  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) Inflation Targeting in NZ:  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 Zealand’s 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 Institutional characteristics of the NZ approach:  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 Institutional characteristics of the NZ approach:  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 Institutional structure of IT in NZ:  Institutional structure of IT in NZ Reserve Bank Slide22:  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 Monetary policy:  Monetary policy Issue 1 Pre-inflation targeting (1975 – 1990) Average inflation = 12.4% Standard deviation = 4.6%:  Pre-inflation targeting (1975 – 1990) Average inflation = 12.4% Standard deviation = 4.6% Post price stability (1992 – 2006) Average inflation = 2.2% Standard deviation = 0.7%:  Post price stability (1992 – 2006) Average inflation = 2.2% Standard deviation = 0.7% Pre-inflation targeting (1975 – 1990) Average GDP Growth = 1.5% Standard deviation = 2.8%:  Pre-inflation targeting (1975 – 1990) Average GDP Growth = 1.5% Standard deviation = 2.8% Post price stability (1992 – 2006) Average GDP Growth = 3.4% Standard deviation = 2.0%:  Post price stability (1992 – 2006) Average GDP Growth = 3.4% Standard deviation = 2.0% But Inflation targeting was part of a wider economic reform program in the late 1980s – early 1990s:  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 Inflation Targeting in New Zealand, Canada, and the UK:  Inflation Targeting in New Zealand, Canada, and the UK INFLATION TARGETING::  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 INFLATION TARGETING::  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 Slide32:  Thank you!

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