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Reviewing New Zealand's macroeconomic framework

The Macroeconomic Framework Review is examining New Zealand's macroeconomic frameworks, which guide decision-making and policy choices for monetary and fiscal policy, including decisions about taxes, spending, debt and interest rates. These are critical determinants to the wellbeing of current and future New Zealanders and influence outcomes for macroeconomic issues such as growth, employment and inflation. The Review aims to consider how fit-for-purpose our current framework is to respond to emerging and future challenges, and to identify opportunities to adapt and strengthen our framework.

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 1989 and the Public Finance Act 1989 form the legislative core of New Zealand's current macroeconomic framework. This legislation delegates responsibility for pursuing monetary policy objectives to the Reserve Bank and 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 that employment is an important contribution to most New Zealanders' living standards.

Our current macroeconomic frameworks give governments scope to define their own fiscal policy objectives, subject to sustainability requirements. This guides governments to make choices that align with the priorities of the government-of-the-day, whilst also considering the long-term sustainability of those choices.

Monetary and fiscal policies work together to support overall macroeconomic stability.

Macroeconomic stability – predictability in variables including real output growth, inflation, and the current account deficit – can support resource allocation choices, investment, and growth. In turn, this insulates New Zealanders' living standards from the negative effects of economic volatility. Macroeconomic stability supports New Zealanders' income, which buys other things that support living standards, like housing, health and education.

Why undertake the Review now?

The work to review our macroeconomic frameworks initially responded to trends that emerged following the Global Financial Crisis and were exacerbated by the effects of the COVID-19 pandemic. These trends include low economic growth, weak inflation and a reduction in neutral interest rates. Since then we have witnessed an increase in inflation and nominal interest rates, but it is not yet clear whether this indicates a reversal of the previous trend or merely a cyclical variation. We are seeking to better understand what challenges and opportunities these and other 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.

Work programme

The Macroeconomic Frameworks Review is a multi-year programme, which began in 2020.

We are currently in the early phase of the Review. This phase seeks to build our understanding of the current macroeconomic environment, identify challenges and opportunities, and inform further research topics.

The overall 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. At the outset, we expect to consider these big questions:

  • What is it that our macroeconomic frameworks are trying to achieve?
  • What do the structural changes in our economic environment mean for our approach to macroeconomic management?
  • How might policy respond?

As our work progresses, we will continue to engage with interested and affected stakeholders. The June 2021 Macroeconomic Workshop, convened by the Reserve Bank and the Treasury, was a first step in an ongoing dialogue on our macroeconomic framework.

How can you find out more?

Email [email protected]

Last updated: 
Friday, 25 March 2022