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 examine questions such 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 examine the government’s role 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 New Zealanders, both now and in the future, by influencing outcomes for macroeconomic issues such as economic growth, employment and inflation. Currently, our macroeconomic frameworks rest 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.
Day to day, established norms and policy processes support decision-makers to operationalise the principles set forth in legislation. The Public Finance Act 1989 and the Reserve Bank of New Zealand Act 1989 provide for the legislative core of our macroeconomic frameworks. The Reserve Bank of New Zealand Act 2021 was passed into law in August 2021 and is effective from July 2022, superseding the 1989 Act. The new Act’s focus is on modernising how the Reserve Bank operates and is governed, and the changes will help strengthen accountability and transparency.
Why has the Treasury started this work?
The work programme is considering what challenges and opportunities various economic trends pose for macroeconomic stability and fiscal sustainability objectives, and how our framework might adapt to support governments’ policy choices and New Zealanders’ living standards now and in the future. Some of these trends emerged following the Global Financial Crisis and have been exacerbated by the effects of the COVID-19 pandemic, including low economic growth, weak inflation, and a reduction in neutral interest rates. Since then we have seen an increase in inflation and nominal interest rates, although it is not yet clear whether this indicates a reversal of the previous trend or merely a cyclical variation. There is considerable uncertainty over future trends. However, it is important that we think about the implications of these trends now, so we can adapt in a timely way to continue to support living standards.
Taking a multi-year approach to this work will enable us to take a helpfully iterative approach to our analysis and any policy development, leverage related analytical work the Treasury and other stakeholders progress with over this time, and undertake multiple rounds of consultation.
Can you 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 frameworks 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, if any, they would suggest prioritising.
Stabilisation policy and the benefits of a stable macroeconomic environment are not broadly discussed, although 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. Therefore, we expect policy solutions may be of interest to the public as well as stakeholders.
You can get involved by contacting us by 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 consolidate 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 over multiple years.
How can I find out more?
Email [email protected]
We also encourage you to read the speech delivered by Caralee McLiesh, Secretary to the Treasury, at the Joint Reserve Bank of New Zealand/Treasury Macroeconomic workshop in June 2021.
We have started publishing research to help inform our work on the Frameworks Review, including:
- an introductory paper that considers why we care about macroeconomic stability, how our frameworks support these goals, and our effectiveness in doing so (March 2022)
- a note on fiscal and monetary policy interaction at the effective lower bound (the lowest level that policy interest rates could be in practice) (March 2022), and
- a draft working paper on enhancing the role of fiscal policy in macroeconomic stabilisation (June 2021).