Details

Autor(en) / Beteiligte

• Kamber, Gunes
• McDonald, Chris
• Sander, Nick
• Theodoridis, Konstantinos

Titel

Modelling the business cycle of a small open economy: The Reserve Bank of New Zealand's DSGE model

Ist Teil von

• Economic modelling, 2016-12, Vol.59, p.546-569

Ort / Verlag

Amsterdam: Elsevier B.V

Erscheinungsjahr

2016

Quelle

Alma/SFX Local Collection

Beschreibungen/Notizen

• We describe the underlying structure of the new forecast and policy model used at the Reserve Bank of New Zealand and evaluate its ability to explain New Zealand data. Unlike other estimated small-open-economy DSGE models, we find that more than one third of the domestic GDP growth is driven by foreign shocks. The elevated contribution of foreign shocks to the domestic economy is driven by our decision to exclude mapping export demand to data on world GDP. Estimating our model without any foreign demand data limits the response of exports to the real exchange variations. This feature makes exports and, consequently, domestic GDP much more sensitive to variations to foreign demand and raises the importance of foreign shocks to the domestic business cycle. Furthermore, our analysis suggests that a model with “adaptive” expectations is preferred by the data relative to the version of the model with “rational” expectations. In that case, the model explains nominal variables using on average much smaller shocks. •We describe NZSIM — the Reserve Bank of New Zealand's policy and forecasting model.•We discuss the trade-offs in designing a model suitable for a central bank.•The model is estimated using data which covers most of New Zealand's inflation targeting era.•Foreign shocks are found to be important drivers of New Zealand business cycle.•Adaptive expectations are an important extension that improves the model's empirical fit.