Real Effects of Monetary Policy in New Zealand

This article analyses the dynamic effects of unexpected domestic and foreign monetary policy shocks on industrial output in New Zealand based on a new open economy macroeconomic model. Empirical analyses are performed using unrestricted recursive open economy vector autoregressive models involving policy and non-policy variables for New Zealand and four of its most important trading partners (that is, Australia, Japan, the United Kingdom and the United States). The empirical findings are in accord with the qualitative predictions of the conventional monetary transmission mechanism applicable to a small open economy. Consequently, no empirical anomalies are observed in the dynamic behaviour of New Zealand industrial output in response to restrictive monetary innovations of domestic and foreign origin.