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Abstract#
This paper considers the role of fiscal policy in New Zealand’s macroeconomic stabilisation. New Zealand's macroeconomic framework is characterised by an institutional arrangement whereby monetary policy has the primary responsibility for macroeconomic stabilisation. In contrast, fiscal policy is generally oriented around medium-term structural goals and debt sustainability.
There is a need to reassess the role of fiscal policy in the wake of COVID-19 and structural trends. As has been the experience over recent economic cycles, fiscal policy may need to play a significant role in macroeconomic stabilisation in the future, especially if monetary policy becomes constrained by the effective lower bound on interest rates. This paper examines the high-level options for improving the effectiveness of counter-cyclical fiscal policy, including strengthening the automatic stabilisers, counter-cyclical discretionary policies and developing ‘semi-automatic’ stabilisers. There is a need to consider fiscal institutions and administrative capacity to implement stabilisation policy effectively and maintain debt sustainability.
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 this working paper. The paper is presented not as policy, but with a view to inform and stimulate wider debate.
Acknowledgements#
The authors are grateful for the expert assistance on microsimulation modelling from Luke Symes and Meghan Stephens. The authors are thankful for the valuable comments on an earlier version of the paper received from David Carey, Angelia Grant, Neil Kidd, Renee Philip, Lukasz Rawdanowicz, Brendon Riches, Nour Tawk and participants at the Treasury-RBNZ Macro Workshop “Fiscal and Monetary Policy in the wake of COVID-19”, 22 June 2021.