Reserve Bank and the Treasury release book

Reserve Bank and the Treasury release book#

Reserve Bank of New Zealand
The Treasury

The Reserve Bank of New Zealand and the Treasury released today a book entitled “Testing stabilisation policy limits in a small open economy”.

This book contains the proceedings of a conference held in Wellington on June 12th this year. The conference included keynote papers and policy reviews by overseas experts in monetary and fiscal policies, plus a panel discussion by experts from the International Monetary Fund, the Organisation for Economic Cooperation and Development and Victoria University of Wellington. The brief of these experts was to critically review New Zealand's macroeconomic policy frameworks and consider whether alternative, possibly non-conventional, policy tools might be needed to better manage inflation, the exchange rate and economic growth over the business cycle. Some of the issues discussed at the Forum were those reviewed in the Supplementary Stabilisation Instruments report released earlier in the year.

The conference took place in the context of the increasing macroeconomic imbalances that have emerged in New Zealand over the past few years. While some of these imbalances have also been seen in other relatively fast growing economies, including Australia and the United States, this does not mitigate concerns over the eventual process of adjustment and potential implications for longer-term growth.

The overall assessment of the invited speakers and discussants at the conference was that the essential elements of New Zealand’s macroeconomic policy institutions are sound and remain appropriate. Suggestions offered to potentially improve macroeconomic policy frameworks were mainly incremental in nature. Some participants also emphasised that swings in exchange rates and fluctuations in current account balances are often an essential part of the processes of adjusting to domestic and international shocks. Further, some expressed the view that recent international developments and the way they have impacted on New Zealand may have been unique.

Conference participants did not suggest, however, that policy makers in New Zealand can be complacent about the economic outlook or the role of macroeconomic policies in supporting improved long term economic performance. In addition, there was a concern among some that the current configuration of structural policy settings may act to amplify the effects of some of the shocks that hit the economy and thus contribute to the build-up of imbalances and pressure on macroeconomic policy.

The conference discussion suggested several areas of policy that warrant further scrutiny, including issues to do with (i) the role and conduct of monetary policy, (ii) the stabilisation role of fiscal policy, (iii) exchange rate behaviour and potential effects on productivity and (iv) structural policies, particularly as they relate to savings and incentives to invest in residential housing.

The material in this volume provides much food for thought for policy makers in New Zealand, and indeed policy makers in any small open economy charged with running independent policies in an increasingly integrated world.