An Introduction to the New Zealand Treasury Model

Published 30 Sep 2009

Authors: Michael Ryan and Kam Leong Szeto

Abstract

The Treasury is the New Zealand government’s lead advisor on economic and financial issues. Part of this advice consists of providing the government with forecasts of economic and fiscal variables. Economic forecasts are important, not only as a basis for forecasts of tax revenue, but also in informing the government of the macroeconomic environment in which proposed fiscal policy settings will operate. The New Zealand Treasury Model (NZTM) is an important part of the economic forecasting process at the Treasury. This paper has three purposes. The first is to give readers an idea of the key features of NZTM. The second is to detail major changes to the model since the last published documentation of the model (Szeto, 2002). These model developments have enhanced NZTM to provide more detailed forecasts. Key changes include the disaggregation of deflators into the various expenditure GDP components, the introduction of consumption and capital goods imports into the model (rather than just treating them as intermediate imports) and the disaggregation of the inflation equation into tradable and non-tradable components. The final purpose of this paper is to outline briefly NZTM’s role in the Treasury’s forecasting process.

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1 Introduction 1.1 The evolution of NZTM 1.2 The remainder of the paper 2 The general structure of NZTM 2.1 The steady state 2.2 Dynamic path 2.3 The interaction between the dynamic path and the steady state 2.4 Assigning coefficient values in NZTM 3 The production block 3.1 The production block 4 The firm and the rest of the model 4.1 Business investment 4.2 Capital and intermediate imports 4.3 Commodity exports 4.4 Non-commodity exports 4.5 Labour market 4.6 Private consumption 4.7 Imports of private consumption goods and services 4.8 Residential investment 5 Monetary conditions 5.1 Inflation 5.2 Inflation expectations 5.3 Exchange rate 5.4 Interest rates 6 Deflators 6.1 Relative prices 6.2 Prices 7 NZTM in the forecasting process 7.1 The role of NZTM in the forecasting process 7.2 Short-run forecasts 7.3 Exogenous assumptions 7.4 Judgement 7.5 Scenarios 8 Conclusion 8.1 Conclusion References Appendix 1: Steady-state equations Appendix 2: Dynamic equations Appendix 3: Steady-state model variable list Appendix 4: Dynamic model variable list	twp09-02.pdf (342 KB) pp.71
List of Tables Table 1: How flows in economy adjust to achieve steady-state stocks Table 2: Inputs to and outputs of the production block – dynamic (short-run) equations Table 3: Inputs to and outputs of the production block − steady (long-run) state Table 4: Notation for current account deficit identity Table 5: Notation for “other goods” identity
List of Figures Figure 1: Modified Salter-Swan diagram showing macroeconomic balance Figure 2: Stylised diagram of the impact on employment of a consumption shock Figure 3: The production block of the business sector Figure 4: The production block and internal and external balance Figure 5: Determination of employment and wages Figure 6: Impact of higher labour productivity Figure 7: Ratio of business capital stock to private sector hours paid Figure 8: The production block and the rest of the model (dynamic model) Figure 9: Production block and the rest of the model (steady state) Figure 10: Ratio of consumption of housing services to housing stock Figure 11: Real consumption goods import share of total private consumption Figure 12: The ratio of the consumption deflator to the CPI ex housing Figure 13: NZTM and the forecast process Figure 14: Estimation of the historical trend of the labour productivity series Figure 15: Stylised diagram showing the connection between the sector forecast, the dynamic path and the steady-state path Figure 16: Real GDP Figure 17: Real GNE Figure 18: Nominal GDP Figure 19: Inflation Figure 20: Trade weighted index

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1 Introduction

2 The general structure of NZTM

3 The production block

3.1 The production block

4 The firm and the rest of the model

5 Monetary conditions

6 Deflators

7 NZTM in the forecasting process

8 Conclusion

8.1 Conclusion

References

Appendix 1: Steady-state equations

Appendix 2: Dynamic equations

Appendix 3: Steady-state model variable list

Appendix 4: Dynamic model variable list

twp09-02.pdf (342 KB) pp.71

List of Tables

List of Figures

Acknowledgements

Thanks to David Galt, Samuel Direen, Paul Rodway, Tim Hampton Simon McLoughlin and Patrick Conway for helpful editorial comments.

Disclaimer

This document was commissioned by the New Zealand Treasury. However, the views, opinions, findings and conclusions or recommendations expressed in it are strictly those of the author(s), do not necessarily represent and should not be reported as those of the New Zealand Treasury. The New Zealand Treasury takes no responsibility for any errors, omissions in, or for the correctness of, the information contained in this Paper.

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