Sources of macroeconomic fluctuations in the New Zealand economy: a real business cycle perspective

Abstract

The primary objective of this thesis is to assess possible sources of macroeconomic fluctuations in the New Zealand economy, from the perspective of open economy real business cycle theory. Based on a review of the relevant literature, two structural vector autoregressive models are specified. Both models consist of the following macroeconomic variables: foreign output, the foreign real interest rate, the terms of trade, domestic output, domestic employment hours and the domestic real interest rate. The predominant difference between the two models is in the way in which business cycle fluctuations are empirically defined. The models measure business cycle fluctuations using the first difference and Hodrick-Prescott (1980) filters respectively. The mix of variables included in the models allow the relative importance of foreign and domestic shocks to be evaluated. No previous SVAR study of the New Zealand macro-economy has been conducive to this delineation. Shocks emanating from the foreign sector are found to explain a considerable share of New Zealand business cycle variability, particularly over the longer term. Both models are initially estimated over the period 1977:02 to 1996:01. However, to assess the sensitivity of simulation results to the removal of nominal interest rate and other controls and the floating of the New Zealand dollar, the models are also estimated over the sub-sample period 1985:02 to 1996:01. The truncation of the sample period is found to exert an important influence on the empirical conclusions of the thesis.