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Reviewing New Zealand's macroeconomic framework

The Macroeconomic Framework Review will re-examine 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. To this end, the work programme 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 the 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 start this work now?

The work to review our macroeconomic framework responds to trends that emerged following the Global Financial Crisis and have been exacerbated by the COVID-19 economic shock. These trends include low growth, weak inflation and falling neutral interest rates. We are seeking to better understand what challenges and opportunities these 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.

Work programme

Work on the macroeconomic frameworks review was initiated in 2020 and will continue through multiple phases across two to three years.

We are currently in the first phase of the work programme. 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 recent Macroeconomic Workshop, convened by the Reserve Bank and the Treasury on 22 June, was a first step in an ongoing dialogue about our macroeconomic framework.

Over the coming months, public consultation on the Treasury's Statement on the Long-term Fiscal Position will provide a forum to consider many of the issues relevant to New Zealand's macroeconomic settings. We expect this consultation will support conversations about the possible fiscal impacts of any issues and how our macroeconomic settings can adapt to these challenges and opportunities.

How do I find out more?

Email [email protected]

Last updated: 
Tuesday, 22 June 2021