THE LATEST RESERVE BANK OF NEW ZEALAND DISCUSSION PAPERS

15 December, 2006

The following Discussion Papers have been released on the Reserve Bank's
website. The discussion papers are available at
http://www.rbnz.govt.nz/research/discusspapers/

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DP2006/10
A new core inflation indicator for New Zealand
Domenico Giannone and Troy Matheson
http://www.rbnz.govt.nz/research/discusspapers/dp06_10.pdf

DP2006/11
Assessing the fit of small open economy DSGEs
Troy Matheson
http://www.rbnz.govt.nz/research/discusspapers/dp06_11.pdf

DP2006/12
The Present Value Model and New Zealand's current account
Anella Munro and Rishab Sethi
http://www.rbnz.govt.nz/research/discusspapers/dp06_12.pdf

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DP2006/10
A new core inflation indicator for New Zealand
Domenico Giannone and Troy Matheson
http://www.rbnz.govt.nz/research/discusspapers/dp06_10.pdf
Abstract
This paper introduces a new indicator of core inflation for New Zealand, estimated using a dynamic factor model and disaggregate price data. Using disaggregate price data we can directly compare the predictive performance of our core indicator with a wide range of other 'core inflation' measures estimated from disaggregate prices, such as the weighted median and the trimmed mean. Predictive performance is assessed relative to a centred 2 year moving average of past and future annual inflation outcomes. The 2 year centred moving average is used as an analytical approximation of the inflation target from the PTA, which requires the Reserve Bank to keep annual inflation between 1 and 3 per cent on average over the medium term. We find that our indicator produces relatively good estimates of this characterisation of core inflation when compared with estimates derived from a range of other models.

DP2006/11
Assessing the fit of small open economy DSGEs
Troy Matheson
http://www.rbnz.govt.nz/research/discusspapers/dp06_11.pdf
Abstract
We describe a simple extension of the Monacelli (2005) small open economy model that incorporates a non-tradable good, habit persistence and price indexation. The empirical fit of eight different specifications of this model is then tested in a Bayesian framework using data for three small open economies: Australia, Canada, and New Zealand. The results show that the model with a non-tradable good fits the data better than the one-good model across all specifications considered. In contrast to Rabanal and Rubio-Ramarez (2005), we find that adding price indexation to either the one- or two-good model deteriorates overall empirical fit.

DP2006/12
The Present Value Model and New Zealand's current account
Anella Munro and Rishab Sethi
http://www.rbnz.govt.nz/research/discusspapers/dp06_12.pdf
Abstract
This paper tests the present value model of the current account on New Zealand data. There is some evidence in favour of the PVM - the current account tests as stationary and Granger-causes changes in national net income. However, the cross-equation restrictions implied by the model are rejected both individually and jointly. This result holds for both the linear and non-linear versions of the tests. The orthogonality test results are consistent with rejection due to the presence of a transitory demand shock. We conclude that a richer model is needed to understand current account dynamics.

ENDS

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