Treasury Releases June Working Papers

The Treasury today released seven new working papers in the June instalment of its Working Papers series.

This quarter's set of papers includes:

• A dynamic computable general equilibrium (CGE) model of the New Zealand economy (WP 02/07)
• Growth and volatility regime switching models for New Zealand GDP data (WP 02/08)
• Inter industry linkages in New Zealand (WP 02/09)
• Growing pains: New Zealand qualitative evidence on hurdles to exporting growth (WP 02/10)
• Population ageing and the efficiency of fiscal policy in New Zealand (WP 02/11)
• Institutions, social norms and well-being (WP 02/12)
• How many jobs? A leading indicator model of New Zealand employment (WP 02/13).

A full list of the abstracts from all six papers follows.

The papers can all be found at [http://www.treasury.govt.nz/publications/research-policy/.]

The Treasury Working Papers series contains work in progress on a variety of economic and financial issues. The series aims to help increase understanding of Treasury and its work, and to make this work available to a larger audience. The working papers build internal capability, as well as generating more informed debate on key issues. The series has been running since 1998.

The views expressed in the Working Papers are those of the authors and do not necessarily reflect the views of the New Zealand Treasury. The papers are presented not as policy, but with a view to inform and stimulate wider debate.

ENDS 

02/07 A dynamic computable general equilibrium (CGE) model of the New Zealand Economy
Kam Leong Szeto (The Treasury)

This paper documents the structure and key properties of the computable general equilibrium (CGE) model of the New Zealand economy. It is a three-good, small open economy model, which features a well-developed production block. This production block has been estimated as a system using Full Information Maximum Likelihood. Another key feature of the model is that it has a two-tiered structure: the steady-state version of the model and the dynamic version of the model. Using the steady-state version of the model, a macroeconomic balance measure of New Zealand's equilibrium exchange rate can be derived. Furthermore, the steady-state model provides estimates of potential output, which is used to measure the level of excess demand in the economy. The dynamic model is used to trace the dynamic response of a range of macroeconomic variables to various shocks such as changes to world prices for exports and changes to government policy.

02/08 Growth and volatility regime switching models for New Zealand GDP data
Robert A Buckle (The Treasury), David Haugh (The Treasury) and Peter Thomson (Statistics Research Associates Ltd)

This paper fits hidden Markov switching models to New Zealand GDP data. A primary objective is to better understand the utility of these methods for modelling growth and volatility regimes present in the New Zealand data and their interaction. Properties of the models are developed together with a description of the estimation methods, including use of the Expectation Maximisation (EM) algorithm. The models are fitted to New Zealand GDP and production sector growth rates to analyse changes in their mean and volatility over time. The paper discusses applications of the methodology to identifying changes in growth performances, and examines the timing of growth and volatility regime switching between production sectors. Conclusions to emerge are that, in contrast to the 1980s, New Zealand GDP growth experienced an unusually long period of time in high growth and low volatility regimes during the 1990s. The paper evaluates sector contributions to this 1990s experience and discusses directions for further development.

02/09 Inter industry linkages in New Zealand 
Iris Claus (The Treasury)

This paper investigates the production structure of the New Zealand business sector using the recently released 1996 input output tables. The analysis is undertaken at the most disaggregated level for which data are available, 126 industries. Indices of backward and forward linkages, measures of industry interconnectedness and a value added production multiplier are calculated. The ranking of industries by degree of connectedness depends on whether direct transactions or both direct and indirect transactions are considered. In 1996, wholesale and retail trade, air transport, services to transport and storage, central government administration, meat processing, and dairy product manufacturing had the strongest backward and forward links with other industries.

02/10 Growing Pains: New Zealand qualitative evidence on hurdles to exporting growth 
Geoff Simmons (The Treasury)

This paper surveys qualitative evidence with the aim of identifying consistent issues surrounding the growth of New Zealand firms. The available literature is focussed on exporters and raises the possibility of two "hurdles" to growth for New Zealand firms. The first is the fixed-cost hurdle to entering exporting. The second is the hurdle of establishing the offshore distribution channels required for continued growth. While the evidence for these hurdles is far from conclusive, their existence is consistent with many of the available case studies. The hurdle to ongoing growth may explain why so many promising New Zealand companies are sold to foreign firms in the same industry. Overseas ownership by a firm in the same industry often solves the distribution problems of many small New Zealand firms and allows growth to continue. The outcome of overseas ownership is therefore not necessarily bad for New Zealand. The case study evidence suggests many plausible causes of these hurdles. These include New Zealand's small market size and distant location and the fluctuating exchange rate. While the evidence on capital markets is mixed, case studies suggest a possible lack of specialised expertise on the part of New Zealand's small venture capital industry may also be a hurdle to growth.

02/11 Population ageing and the efficiency of fiscal policy in New Zealand
Nick Davis and Richard Fabling (The Treasury)

New Zealand's ageing population is expected to have a significant impact on long-term government expenditure, particularly in the areas of health and superannuation. Recent projections from Treasury's Long-Term Fiscal Model suggest that, under current policy settings, government expenditure (excluding financing costs) will increase by approximately seven percentage points of GDP by 2050. From the perspective of economic efficiency, we consider several methods for financing that expenditure.

We find that tax smoothing is significantly more efficient, from a welfare perspective, than balancing the budget. This result is primarily due to our assumption that the assets accumulated under tax smoothing earn an average return over the government's cost of borrowing. This excess return is not without risk. By modelling asset returns and economic growth in a stochastic manner we find that tax smoothing with a diversified portfolio of financial instruments may also reduce year-on-year tax rate volatility.

Introducing practical considerations, in particular expenditure creep (where additional government spending is triggered by an improving balance sheet position), tips the scales in favour of a balanced budget approach. Hence, strong fiscal institutions are a prerequisite for achieving the welfare gains from tax smoothing.

02/12 Institutions, social norms and well-being 
Murray Petrie (Economics and Strategy Group)

This paper discusses the intrinsic and instrumental value of governance and social norms to the well being of New Zealanders. The interaction between informal social norms and formal institutions is also discussed. An attempt is made to identify the channels and precise mechanisms through which governance and social norms respectively may impact on well-being. Empirical evidence on these effects is cited, and the relevance of the evidence to New Zealand is assessed. A range of suggestions is then presented for strengthening the governance of public institutions in New Zealand, focusing on improvements to transparency, accountability and integrity within existing constitutional arrangements. Finally, some tentative remarks are made on the potential role of government in influencing the evolution of social norms, and managing tensions between conflicting norms in New Zealand.

02/13 How many jobs? A leading indicator model of New Zealand employment
Edda Claus (The Australian Treasury) and Iris Claus (The Treasury)

This paper constructs a composite index of leading indicators of New Zealand employment. The choice of variables and their weights in the composite index are determined by their concordance with employment. The composite index is included in an indicator model to forecast quarterly employment growth. The indicator model explains about 67 percent of the quarterly variation in employment, in sample, and correctly predicted the direction of next period employment almost 80 percent of the time, out of sample.