4 SVAR Results
This section reports our results from the structural VAR (SVAR) analysis to examine the size, direction and effects of international growth spillovers to New Zealand economy. The baseline SVAR model of subsection 4.1 includes the four key New Zealand macroeconomic variables (GDP growth, inflation, interest rates and the real exchange rate), together with quarterly GDP growth for China or the USA. Australia is also included in these models, due to its important role for the New Zealand economy, and to allow spillovers from shocks to GDP growth originating in Australia (and not due to China/USA) to be examined. Subsection 4.2 then employs extended models to investigate the role of commodity prices for the New Zealand economy, in a specification that also includes both China and US growth. Further analysis of this extended model investigates the relative importance of different shocks for New Zealand's historical growth and real exchange rate movements (subsection 4.3) and the impacts of China and US growth on world commodity price inflation (subsection 4.4).
As explained in Section 2, our SVARs impose block exogeneity restrictions, so that China and/or the USA (as appropriate) is exogenous to both Australia and New Zealand, with no feedback from these smaller economies to growth in China/USA. Australian output is similarly treated as exogenous with respect to New Zealand, based on the assumption that New Zealand is a small economy in relation to its neighbour. Finally, within the domestic (New Zealand) block, the conventional contemporaneous causal ordering is adopted of output growth, inflation, interest rates and the exchange rate. Dynamics are captured through a single lag in the SVAR context, which is sufficient to capture the dynamics adequately[7].
Matlab software is used for SVAR estimation and analysis. As usual for SVAR models, the results are presented mainly through impulse response functions and historical decompositions. Those presented reflect the focus of the paper, namely the role of foreign output growth for the New Zealand economy.
Notes
- [7]A lag length of one is indicated as appropriate by the Akaike Information Criteria in an unrestricted VAR specification. Detailed results are not reported to conserve space.
