How many jobs? A leading indicator model of New Zealand employment

This paper constructs a composite index of leading indicators of New Zealand employment. The choice of variables and their weights in the composite index are determined by their concordance with employment. The composite index is included in an indicator model to forecast quarterly employment growth. The indicator model explains about 67 percent of the quarterly variation in employment, in sample, and correctly predicted the direction of next period employment almost 80 percent of the time, out of sample.Composite index of leading indicators, forecasting, employment

Inter industry linkages in New Zealand

This paper investigates the production structure of the New Zealand business sector using the recently released 1996 input output tables. The analysis is undertaken at the most disaggregated level for which data are available, 126 industries. Indices of backward and forward linkages, measures of industry interconnectedness and a value added production multiplier are calculated. The ranking of industries by degree of connectedness depends on whether direct transactions or both direct and indirect transactions are considered. In 1996, wholesale and retail trade, air transport, services to transport and storage, central government administration, meat processing, and dairy product manufacturing had the strongest backward and forward links with other industries.Input output models, inter industry dependencies

Asymmetric Information, Financial Intermediation and the Monetary Transmission Mechanism: A Critical Review

Macroeconomic models currently used by policy makers generally assume that the workings of financial markets can be fully summarised by financial prices, because the Modigliani and Miller (1958) theorem holds. This paper argues that these models are too limited in describing how monetary policy (and other) shocks are transmitted to the economy and points to new directions. The models are too limited because they disregard an information asymmetry between borrowers and lenders and the importance of financial intermediaries not only for individual depositors but the economy as a whole. Incorporating financial market interactions into macroeconomic models will enhance the understanding of the transmission mechanisms of monetary policy and other shocks.Financial intermediaries; credit channel; monetary transmission mechanism; open economies

Saving in New Zealand: Measurement and Trends

This paper examines the trends in saving in New Zealand. It considers different sources of information about saving and highlights issues with the measurement of saving. Illustrations are provided of the impact of adjusting saving for both the effects of inflation and the inclusion of some items of expenditure, which are typically counted as consumption. The difficulty of drawing clear implications for policy on the basis of our existing knowledge and data on saving and wealth levels in New Zealand is highlighted. An appendix to the paper includes a comprehensive set of data on New Zealand saving and related variables.Saving by sectors, measurement

New Zealand’s Production Structure: An International Comparison

The purpose of this paper is to compare New Zealand’s production structure in the mid-1990s to that in other OECD countries using input output analysis. Comparable inter industry transactions tables to the New Zealand data are available for Australia, Belgium, Denmark, Finland, Germany, Norway and the United Kingdom. The composition of total supply and value added is examined across countries. Backward and forward linkages, indices of industry interconnectedness, a value added production multiplier, a cumulated primary input coefficient for compensation of employees and a measure of import content of final demand output are calculated, taking into account direct and indirect transactions. New Zealand’s industrial structure is broadly similar to that in other OECD countries. Some differences arise as certain industries are more important in some countries. New Zealand’s exports appear to be more diversified and have a large value added content. Moreover, the return to capital, as measured by the share of gross operating surplus in value added, is high.Input output models; industry importance; production structure; inter industry dependencies; country comparisons

Agency costs and asymmetric information in a small open economy: a dynamic general equilibrium model

This paper assesses the effects of agency costs and asymmetric information in credit markets. Asymmetric information and agency costs occur whenever lenders delegate control over resources to borrowers, leading to adverse selection, moral hazard and monitoring costs because of the inability to monitor borrowers costlessly. Financial intermediaries can help overcome this imperfect information, leading to a more efficient allocation of resources. Macroeconomic models currently used by policy makers generally disregard credit market conditions. The basis of the analysis follows Carlstrom and Fuerst (1997). The model is extended to an open economy with a floating exchange rate and slowly adjusting goods prices. Moreover, a government and an inflation targeting monetary authority are introduced. The foreign sector is incorporated following McCallum and Nelson (1999). Firms use imported commodity inputs to produce output. They sell the output to domestic and foreign consumers and exports are a function of the real exchange rate and foreign demand. Incorporating a foreign sector has at least two implications. First, an open economy faces the possibility of shocks that originate from the rest of the world. Second, with a floating exchange rate, movements in the relative price of currencies affect the supply and demand of products and factors of production. The framework of the analysis is a dynamic general equilibrium model with microeconomic foundations, where agents’ decisions are derived from optimising behaviour. The model is calibrated for New Zealand. The steady states with and without agency costs are derived and the effects of these costs on business cycle fluctuations are assessed. A decline in the information asymmetry between borrowers and lenders leads to lower agency costs and an increase in the long-run level of steady state capital, investment and output. The presence of agency costs also affects the business cycle and the monetary authority’s response to shocks in the economy. Moreover, the exchange rate is subject to larger cyclical swings in the presence of agency costs, leading to additional substitution effects as imports are a production input. One of the key results in Carlstrom and Fuerst (1997), a hump shaped response of output and investment to a productivity shock, still prevails in the small open economy set-up. The diffrerences in the adjustment paths of the model with and without agency costs following a shock to the economy provide evidence of quantitatively important effects of agency costs and information asymmetries. The finding suggests that macroeconomic models that do not explicitly account for asymmetric information in credit markets provide an incomplete description of the economy.open economy, agency costs, asymmetric information, dynamic general equlibrium analysis

Household Net Wealth: An International Comparison

Household saving can be measured as either the difference between the flows of current income and expenditure, or through households’ balance sheets as changes in the stocks of accumulated net wealth. This paper examines household saving in New Zealand and other OECD countries, with particular focus on the stock of net wealth. The ratio of real assets to disposable income in New Zealand is close to OECD levels. However, household financial net wealth as a proportion of disposable income has been falling in New Zealand since the late 1980s, whereas it has been rising in other OECD countries. As a result, housing assets in New Zealand have become an increasing share of households' wealth portfolios. The implied savings rate from households’ balance sheets is significantly higher than the flow measure. Moreover, it follows the business cycle more closely, consistent with consumption smoothing behaviour by households.Household net wealth, saving, financial deregulation

Financial Systems and Economic Growth: An Evaluation Framework for Policy

The purpose of this paper is to develop an analytical framework for discussing the link between financial systems and economic growth. Financial systems help overcome an information asymmetry between borrowers and lenders. If they do not function well, economic growth will be negatively affected. Three policy implications follow. First, the analysis underscores the importance of maintaining solid legal foundations because the financial system relies on these. Second, it demonstrates the necessity for reforming tax policy as it applies to investment, as this is demonstrated to significantly affect the operation of the financial system. Finally, given the importance of financial development for economic growth, a more in-depth review of New Zealand’s financial system in the context of financial regulation and supervision would be valuable.Economic growth; financial development; financial systems; financial regulation; legal system; institutions; tax

An empirical investigation of fiscal policy in New Zealand

This paper examines the effects of fiscal policy, measured by changes in government spending and net tax (government tax revenue less transfer payments), on New Zealand GDP. The framework of analysis is a structural vector autoregression (VAR) model of the New Zealand economy, employing and extending estimation techniques used by Blanchard and Perotti (2002). This model is then used to examine the dynamic effects of changes in government spending, taxes and transfers on GDP and the contributions of discretionary fiscal policy to New Zealand business cycles.Fiscal policy, business cycle fluctuations, vector autoregression

The Elasticity of Taxable Income in New Zealand

This paper reports estimates of the elasticity of taxable income with respect to the net-of-tax rate for New Zealand taxpayers. The relative stability of the New Zealand personal income tax system, in terms of marginal rates, thresholds and the tax base, provides helpful conditions for deriving these estimates. The elasticity of taxable income was estimated to be substantially higher for the highest income groups. Changes in the timing of income flows for the higher income recipients were found to be an important response to the announcement of a new higher-rate bracket. The marginal welfare costs of personal income taxation were consistent across years, being relatively small for all but the higher tax brackets. For the top marginal rate bracket of 39 per cent, the welfare cost of raising an extra dollar of tax revenue was estimated to be well in excess of a dollar