What is macroeconomics?
Macroeconomics is the study of whole economies and how the aggregate pieces of the economy fit together – including business, government, households and trading partners.
Macroeconomists study such questions as: What makes the business cycle fluctuate; what makes economic growth go up and down; how are prices determined; what is the rate of inflation, and what determines it; what is productivity growth; and what are the determinants of productivity? Importantly, macroeconomists also study the role government has in determining the pace of growth, the long-run rate of potential output in an economy, and the inflation rate.
What are New Zealand's macroeconomic frameworks?
Our macroeconomic frameworks guide decision-making and policy choices about taxes, spending, debt and interest rates. These choices are critical determinants to the wellbeing of current and future New Zealanders by influencing outcomes for macroeconomic issues such as growth, employment and inflation. Currently, our macroeconomic framework rests on three institutional pillars:
- sustainable public finances based on principles of responsible and transparent fiscal management
- stable prices and maximum sustainable employment delivered by a central bank that makes independent monetary policy decisions, and
- a financial system that is well-regulated so it is stable and resilient to shocks.
The Public Finance Act 1989 and the Reserve Bank of New Zealand Act 1989 provide for the legislative core of our macroeconomic framework. Day to day, established norms and policy processes support decision-makers to operationalise the principles set forth in legislation.
Why is the Treasury starting this work now?
The work programme is considering economic trends – including low interest rates, weak inflation and demand pressures – that have emerged over recent decades and have been exacerbated by the COVID-19 economic shock. As we emerge from this shock, there is considerable uncertainty over future trends. However, it is important that we begin the implications of these trends now, so we can adapt in a timely way to support living standards.
Taking a multi-year approach to this work will enable us to take an iterative approach to our analysis and any policy development, leverage related analytical work the Treasury and other stakeholders progress over this time, and undertake multiple rounds of consultation.
Can I get involved?
Yes, this isn't a challenge we can or want to address solely from within the Treasury. To help us develop our understanding and our advice, we are seeking to work with experts across New Zealand to consider these complex questions of macroeconomic policy. Decisions made on any new macroeconomic framework could affect New Zealanders for years to come, so we also plan to work with stakeholders and communities of interest, to hear their views on what matters to them and which policy trade-offs they would prioritise.
Stabilisation policy and the benefits of a stable macroeconomic environment are not broadly discussed, but macroeconomic instability can be felt widely across society, for example through elevated levels of unemployment. 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. Accordingly, we expect policy solutions may be of interest to the public and stakeholders.
You can get involved by contacting us, email [email protected]
What stage of the process are we at now?
We are currently in the first phase of the work programme. This phase seeks to build our understanding of the current macroeconomic environment, identify possible challenges and opportunities, and inform further research topics.
Work on the macroeconomic frameworks review was initiated in 2020 and will continue through multiple phases across two to three years.
How can I find out more?
Email [email protected]