Determinants of the New Zealand Yield Curve: Domestic vs. Foreign Influences (WP 14/19)

Abstract

This paper examines the relationship between the New Zealand government yield curve and the contribution of global and domestic factors influencing it. We apply the Nelson and Siegel method, which has been widely used internationally for fitting a yield curve, to decompose it into three independent factors - level, slope and curvature. We then analyse the link between each New Zealand yield curve factor, the global factors and observable domestic and international macroeconomic variables.

We find that approximately half the movement in the level factor for New Zealand, which drives the yield curve at long maturities, is explained by the global level factor. Meanwhile, the global slope factor explains around a third of the movement in New Zealand's slope factor. Of the remaining domestically driven components, it is difficult to identify a significant role for any specific domestic macroeconomic variables. However, domestic variables have a larger impact on the slope and curvature factors as shorter maturities are more directly under the control of the monetary authority and react to macroeconomic fundamentals. The output gap in particular is highly relevant in explaining the slope of the yield curve.

Acknowledgements

The authors would like to thank Matthew Bell, Dhriti Bose, Sam Direen, Tore Hayward, Leo Krippner and Dr. Hai Lin for their helpful comments and suggestions. We would also like to thank the participants at the NZAE and University of Victoria's Macroeconomic Dynamics seminars for their helpful comments on an earlier draft.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.