Reviewing New Zealand's macroeconomic frameworks

Why do macroeconomic frameworks matter?

Well-developed macroeconomic frameworks can make a significant contribution to New Zealanders’ living standards. The Reserve Bank of New Zealand Act 2021 and the Public Finance Act 1989 form the legislative core of New Zealand’s current macroeconomic frameworks.

This legislation delegates responsibility for pursuing monetary policy objectives to the Reserve Bank, while it requires the Government to articulate a transparent and sustainable fiscal strategy.

The Reserve Bank’s monetary policy objectives prioritise price stability and maximum sustainable employment to promote New Zealanders’ long-term wellbeing. This reflects that high and/or unstable inflation increases uncertainty throughout the economy, potentially reducing investment and distorting decisions regarding work and consumption. It also reflects the important contribution of employment to most New Zealanders’ living standards.

New Zealand’s current macroeconomic frameworks give governments scope to define their own fiscal policy objectives, subject to sustainability requirements. This guides governments towards considering both their near-term priorities and the long-term sustainability of those choices.

Monetary and fiscal policies work together to support overall macroeconomic stability. Macroeconomic stability – the predictability in variables including real output growth, inflation, and the current account deficit – can support resource allocation choices, investment, and economic growth. In turn, this protects New Zealanders’ living standards from the negative effects of economic volatility.

Macroeconomic stability supports New Zealanders’ income, which is spent on other things that support living standards – like housing, health, and education.

What is the aim of the Review?

The Review aims to identify ways to set up effective fiscal and monetary policy frameworks that will be able to respond to the full range of economic challenges the country might face over the next few decades – and that will support New Zealand’s resilience and sustainability across a range of possible future economic circumstances.

In recent years, the world economy has presented no shortage of challenges for New Zealand’s macroeconomic frameworks. The Global Financial Crisis resulted in a worldwide recession and a prolonged period of weak economic growth, low inflation, and low interest rates.

More recently, the COVID‑19 pandemic initially presented similar challenges. Like many other countries, New Zealand responded to the pandemic with fiscal stimulus, and the use of Additional Monetary Policy (AMP) tools for the first time. Economies around the world subsequently recovered strongly and faced tight labour markets and the highest inflation in 30 years.

Supporting New Zealand’s resilience and sustainability

The Review initially focused on challenges arising from low interest rates, such as macroeconomic stabilisation once interest rates reach their ‘effective lower bound’ (ELB). As the global economic environment shifted in the wake of the COVID-19 pandemic, and following discussions with a range of experts in the New Zealand macroeconomics community, we are now considering a broad range of issues.

The review aims to ensure that New Zealand’s macroeconomic frameworks are well set up to support New Zealand’s resilience and sustainability across a range of possible future economic circumstances. We will also consider how macroeconomic frameworks can be set up to support inter- and intra-generational equity and productivity growth. These four aims – resilience, sustainability, distribution, and productivity – link back to the four cross-cutting analytical prompts in the Treasury's Living Standards Framework.

The work programme

The work programme will continue to evolve as we develop our view on how fit for purpose our macroeconomic frameworks remain in the face of change, and what options there might be to improve them.

Through the Review, we expect to be considering questions such as these:

• What is it that our macroeconomic frameworks are trying to achieve?
• What do possible structural changes in our economic environment mean for our approach to macroeconomic management?
• What implications do long-term challenges like climate change, an ageing population, and retreating globalisation have for our macroeconomic frameworks?
• How are different groups of people affected by the way our macroeconomic frameworks are currently set up?
• How did our macroeconomic frameworks perform through the COVID-19 pandemic and what lessons are there for how we manage future shocks?
• How could macroeconomic policy respond if global interest rates reached very low or very high levels in the future?
• How can we set up New Zealand’s macroeconomic frameworks to best prepare for the challenges the coming decades might bring?

A multi-year approach enables us to take a helpfully iterative approach to our analysis and any policy development, and to leverage related analytical work the Treasury and other stakeholders progress with over this time.

Can you get involved?

Yes – this isn’t a challenge we can or want to address solely from within the Treasury. To help us with developing our understanding and our advice, we anticipate continuing to work with experts across New Zealand to consider the complex questions of macroeconomic policy.

Macroeconomic instability can be felt widely across society, for example through elevated levels of unemployment or inflation. Similarly, any eventual policy changes that seek to strengthen our ability to stabilise the economy may be expected to have material impacts on living standards. Therefore, we expect policy solutions may be of interest to the public as well as stakeholders. As such, we plan to periodically engage with stakeholders and communities of interest, to hear their views on what matters to them and which policy trade-offs, if any, they would suggest prioritising.

The June 2021 Macroeconomic Workshop, convened by the Reserve Bank and the Treasury, was a first step in an ongoing dialogue on our macroeconomic frameworks. We have also been speaking with a range of experts in the New Zealand macroeconomics community about this work. As our work progresses, we will continue to engage with interested and affected stakeholders.

You can register your interest in becoming involved, by emailing the Review team here: [email protected].

Recent Treasury research related to macroeconomic frameworks

Since 2021, the following papers with a relevance to macroeconomic frameworks have been published on the Treasury website:

• Enhancing the role of fiscal policy in New Zealand’s macroeconomic stabilisation
• Semi-automatic fiscal stabilizers for New Zealand
• Fiscal – monetary coordination: A retrospective
• Long-run trends in New Zealand’s real neutral interest rate
• Long-term Consequences of Russia-Ukraine War – a Tipping Point?
• The Treasury’s analysis and recommendations for fiscal rules
• The impact of New Zealand’s macroeconomic frameworks on living standards
• Fiscal and monetary policy interaction at the effective lower bound
• He Puna Hao Pātiki: 2022 Investment Statement
• The Wealth Ladder: House Prices and Wealth Inequality in New Zealand
• He Tirohanga Mokopuna 2021 - Statement on the long-term fiscal position
• A speech delivered by Caralee McLiesh, Secretary to the Treasury, at the Joint Reserve Bank of New Zealand/Treasury Macroeconomic workshop in June 2021
• The Macroeconomic Effects of Government Spending Shocks in New Zealand