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Working paper

A Structural VAR Model of the New Zealand Business Cycle (WP 02/26)

Issue date: 
Sunday, 1 December 2002
Status: 
Current
View point: 
Publication category: 
JEL classification: 
C22 - Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
E44 - Financial Markets and the Macroeconomy
F41 - Open Economy Macroeconomics

Formats and related files

This paper develops a new open economy structural VAR model of the New Zealand economy.

Abstract

This paper develops a new open economy structural VAR model of the New Zealand economy. The model adopts techniques introduced by Cushman and Zha (1997) and Dungey and Pagan (2000) to identify international and domestic shocks and dynamic responses to these shocks in a small open economy. The international variables are block exogenous and the model includes restrictions on contemporaneous and lagged variables. Novel features include the introduction of an expanded set of domestic financial variables not captured in previous New Zealand VAR models, the use of a forward looking Taylor Rule to identify monetary policy, and the introduction of a climate variable to capture the impact of climatic conditions on the business cycle. Key results to emerge are the significant influence of international variables on the New Zealand business cycle, the importance of separately identifying import price and export price shocks, and the significant influence of climate.

Acknowledgements

The model developed in this paper arose from the need within Treasury to better understand the forces that contribute to fluctuations in New Zealand’s GDP and to provide a basis for applying structural VAR modelling to other policy related issues. Michele Lloyd, Roger Ridley, Maryanne Aynsley, Mark Blackmore, Struan Little and Steve Cantwell have been instrumental in supporting this work. The authors thank John Creedy, Mardi Dungey, Arthur Grimes, David Hargreaves, Alfred Haug, Ozer Karagedikli, Adrian Pagan and Chris Plantier for helpful discussions and suggestions during the preparation of this paper. Comments from participants at a Treasury seminar held in June 2002, a Conference of the New Zealand Association of Economists held in June 2002, and a New Zealand Econometrics Study Group meeting held in August 2002 are gratefully acknowledged. Thanks are also due to Jenny Whalley for her assistance with the preparation of diagrams and formatting.

Disclaimer

The views expressed in this Working Paper are those of the author(s) and do not necessarily reflect the views of the New Zealand Treasury. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

Last updated: 
Tuesday, 23 October 2007