Modelling Structural Change: The Case of New Zealand

Reserve Bank of New Zealand Discussion Paper No. DP2003/03

16 Pages Posted: 26 Jun 2003

See all articles by Olivier Basdevant

Olivier Basdevant

International Monetary Fund (IMF) - IMF Institute; Government of New Zealand - Department of Economics

David Hargreaves

Government of New Zealand - Department of Economics

Date Written: April 2003

Abstract

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.

JEL Classification: C52, C53, E52

Suggested Citation

Basdevant, Olivier and Hargreaves, David, Modelling Structural Change: The Case of New Zealand (April 2003). Reserve Bank of New Zealand Discussion Paper No. DP2003/03. Available at SSRN: https://ssrn.com/abstract=404401 or http://dx.doi.org/10.2139/ssrn.404401

Olivier Basdevant (Contact Author)

International Monetary Fund (IMF) - IMF Institute ( email )

700 19 th Street NW
Washington, DC 20431
United States

Government of New Zealand - Department of Economics ( email )

2 The Terrace
P.O. Box 2498
Wellington
New Zealand

David Hargreaves

Government of New Zealand - Department of Economics ( email )

2 The Terrace
P.O. Box 2498
Wellington
New Zealand

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