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Modelling structural change: the case of New Zealand

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This paper documents the Reserve Bank of New Zealand's current approach to dealing with structural change, an important feature of New Zealand's recent macroeconomic history after the profound economic reforms undergone in the past twenty years. Traditional estimated macroeconomic models of New Zealand have broken down over time, which led to the mid 1990's creation of the Forecasting and Policy System (FPS). In this paper, we analyse why the FPS has proved more robust to structural change and discuss steps we are taking to develop carefully chosen alternative models to complement FPS. Because those alternative models are clearly subject to structural change as well, in developing them we have looked hard at estimation approaches that allow for structural instability. In this paper, we document the results of subjecting some key nominal relationships to stability tests and explicit modelling of structural change. We find preliminary evidence that New Zealand's inflation targeting regime has caused structural shifts in pricing behaviour and expectations formation.

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  • Olivier Basdevant & David Hargreaves, 2003. "Modelling structural change: the case of New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/03, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbdps:2003/03
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    1. Olivier Basdevant & Nils Björksten & Özer Karagedikli, 2004. "Estimating a time varying neutral real interest rate for New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP 2004/01, Reserve Bank of New Zealand.
    2. Paul G. Egan & Anthony J. Leddin, 2017. "The Chinese Phillips curve – inflation dynamics in the presence of structural change," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 15(2), pages 165-184, April.
    3. Luis Fernando Melo Velandia & Martha Alicia Misas Arango, 2004. "Modelos Estructurales de Inflación en Colombia: Estimación a través de Mínimos Cuadrados Flexibles," Borradores de Economia 3244, Banco de la Republica.
    4. Özer Karagedikli & Rishab Sethi & Christie Smith & Aaron Drew, 2008. "Changes in the transmission mechanism of monetary policy in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/03, Reserve Bank of New Zealand.
    5. Nils Björksten & Özer Karagedikli, 2003. "Neutral real interest rates revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 66, pages 1-11, September.
    6. Kam Leong Szeto & Paul Gardiner & Richard Gray & David Hargreaves, 2003. "A Comparison of the NZTM and FPS Models of the New Zealand Economy," Treasury Working Paper Series 03/25, New Zealand Treasury.
    7. James Twaddle & David Hargreaves & Tim Hampton, 2006. "Other stabilisation objectives within an inflation targeting regime: Some stochastic simulation experiments," Reserve Bank of New Zealand Discussion Paper Series DP2006/04, Reserve Bank of New Zealand.

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    More about this item

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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