Analytical note

The impact of New Zealand’s macroeconomic frameworks on living standards (AN 22/02)

Staff and teams are writing in their individual capacity and the views in this paper are not necessarily a “Treasury” view. Please read Disclaimer for research and commentary publications.

Extract from paper#


Macroeconomic frameworks guide decision-making for monetary, macroprudential and fiscal policy. Among other goals, these policies aim to stabilise the economy to improve welfare.[1] The objectives of this note are to:

  • examine the rationale, underlying assumptions, and goals of the current frameworks, with a focus on the macroeconomic stability objective, and
  • assess how the current frameworks have supported macroeconomic stability and living standards to date.

This note is part of a broader work programme that is reviewing New Zealand’s macroeconomic frameworks. The review aims to determine whether the frameworks remain fit for purpose and to identify if there are areas that could be adapted to improve their effect on macroeconomic stability and New Zealanders’ living standards. This is an introductory paper that describes the rationale for, and performance of, the current frameworks in a non-technical manner, and it is intended to encourage debate and interest in the review. Other papers will be published in due course, including one that considers how we can enhance fiscal policy’s role in macroeconomic stabilisation, while Riches (2022) looks at the effects of fiscal stimulus when monetary policy is constrained by the lower bound. Furthermore, the Reserve Bank’s forthcoming advice on the Monetary Policy Committee remit, as well as their assessment of the formulation and implementation of monetary policy, will provide a detailed assessment of the current monetary policy framework.

This note starts by clarifying what is meant by macroeconomic stability and how it supports living standards. The subsequent section outlines the key features of our current macroeconomic frameworks, looking separately at fiscal, monetary, and macroprudential policy. Next, the performance of our macroeconomic frameworks to date is considered by looking at how successful they have been at achieving macroeconomic stability, as well as considering other ways in which they may have affected living standards.

Key points#

  • A stable macroeconomic environment improves certainty for households and businesses, supporting them in making economic choices that will improve their wellbeing. Macroeconomic stability can also improve the socio-economic outcomes for those at the lower end of the income or wealth distribution since they are less able to smooth their incomes when there are shocks. Macroeconomic stabilisation frameworks are therefore crucial to supporting living standards.
  • New Zealand’s fiscal framework is underpinned by principles of responsible fiscal management and transparency. Since they were introduced, fiscal sustainability indicators have improved. Fiscal policy has also become more counter-cyclical since the early 2000s and helped to support incomes and labour market attachment during the pandemic. However, a question that needs to be addressed is whether a focus on fiscal prudence has come at the expense of under-investment in infrastructure. More research is required in order to adequately answer this question. Some ways in which fiscal policy has affected inequality are explored, but a comprehensive assessment is outside the scope of this note and remains an area for future research.
  • New Zealand’s monetary policy framework has two main objectives, price stability and maximum sustainable employment. Price signals are integral to the allocation of goods and services in modern economies. Inflation can make it harder to discern these price signals, leading consumers and producers to misallocate scarce resources. The employment objective, which was formalised in 2018 with the introduction of a dual mandate, reflects the view that labour market outcomes should also be considered by the central bank in pursuing its price stability objective. Since the current monetary policy framework was introduced in 1989, the rate and volatility of inflation as well as output volatility have declined. The consensus in the international literature is that monetary policy frameworks have succeeded in lowering and anchoring inflation expectations. Inflation in New Zealand has averaged close to the 2% mid-point target over the 2002-2020 period and has more often than not been within the target range.
  • Macroprudential policy is aimed at reducing risks facing the financial system. The financial system is integral to society’s ability to exchange goods and services, and to save and invest. Moderating the risk of financial disruptions is intended to preserve this capability through time. As discussed in the body of this paper, there is research that shows that the use of loan-to-value ratio restrictions has been successful at improving New Zealand’s financial stability. Monetary policy and macroprudential policy can also affect inequality through various channels, but there is no consensus in the literature yet on their net impact.
  • Further research is required to understand the effectiveness and possible side-effects of the fiscal and monetary policy response to the pandemic, including the effect on asset prices and distributional outcomes.


  1. [1] In addition to stability, fiscal policy also has structure and sustainability objectives (Barker et al., 2008).