## 1nzlea2019003

## Source details

**Canonical URL:** [1nzlea2019003](https://www.imf.org/-/media/files/publications/cr/2019/1nzlea2019003.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2019/1nzlea2019003.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2019/1nzlea2019003.pdf.json)

---

### ANZIMF model and external linkages
- Model: ANZIMF — Australia-New Zealand Integrated Monetary and Fiscal Model, annual, multi-region, micro-founded general equilibrium model based on GIMF.
- Model features (preserved exactly):
  - Consumption dynamics driven by higher-income, saving households and non-saving, lower-income households (LIQ).
  - Non-Ricardian properties via households treating government bonds as wealth; non-saving households consume all income each year.
  - Private investment relies on the Bernanke-Gertler-Gilchrist (1999) financial accelerator.
  - Government instruments: government consumption, infrastructure spending, general lumpsum transfers, lumpsum transfers targeted to LIQ households, taxes on consumption (GST), personal income (PIT), corporate income (CIT).
  - Separate sectors for agriculture and for services (tourism and education).
  - Agricultural sector: U.S. dollar global agriculture price determined on global market; short- and long-term price elasticities of supply are 0.40.
  - Services sector: produced from tradable and nontradable goods; services included exclusively in consumption.
  - Monetary policy under a CPI inflation targeting regime using an interest rate function returning expected inflation to target over several years.
  - Fiscal policy aims to maintain a debt target (expressed as a deficit target) using available instruments.
- Major external linkages for New Zealand (as framed):
  - Agricultural goods trade: agricultural exports account for over 13 percent of New Zealand’s GDP.
  - Services trade: New Zealand is a large exporter of tourism and education services; export links with Australia strongest for services, with China more for agricultural goods.
  - Net migration: near record-high levels in recent years; students (many from Australia and China) staying as permanent residents; flows from Australia include returning New Zealand citizens.

### Growth slowdown in China — scenario design and China outcomes
- Scenario context: global trade tensions disrupt structural reform in China.
- Scenario assumptions (as stated):
  - Lower productivity growth of about 0.5 percent per year for 10 years, reducing economy-wide productivity levels by 5 percent in the long term.
  - Firms face higher risk premiums, an increase of 0.5 percentage points relative to baseline.
  - House prices in major urban centers fall by 10 percent over two years.
  - Demand for imported agricultural goods declines by about 0.5 percent per year, summing to levels that are 9 percent lower in the long term.
- Quantified outcomes for China:
  - Real GDP growth about 1 percentage point lower than in the baseline in the short term.
  - Real GDP growth about 0.6 percent lower for nine years.
  - In the long term, the level of real GDP would be 11.9 percent lower relative to the baseline.
  - Two-thirds of the long-term decline attributable to lower productivity.
  - Inflation in tradable goods prices 1.0 percent lower by the third year and returns to baseline after ten years.
  - Household consumption growth around 0.2 to 0.5 percentage points weaker than real GDP growth.
  - Global agricultural prices lower by almost 1 percent on impact and by 2.1 percent in the long term.

### Spillovers to New Zealand from the China slowdown
- Channels and general effects:
  - Strong trade-channel spillovers via lower global agricultural prices and reduced demand for tourism and education services.
  - Real depreciation of the New Zealand dollar mitigates export impacts over time.
- Quantified NZ outcomes (deviations from WEO-consistent forecasts):
  - Tourism and education exports 1.6 percent lower in the short term.
  - Tourism and education exports 1.0 percent lower in the long term.
  - Goods exports 1.1 percent longer in the short term and 0.5 percent higher in the long term.
  - Global agricultural-price-driven wealth shock leads to a depreciated REER.
  - Consumption 0.9 percent lower relative to baseline in the long term.
  - Real GDP contracts by 0.2 percent on impact and is broadly unchanged relative to baseline in the long term.
- Additional considerations:
  - Net migration effects analyzed as an exacerbating factor to the China slowdown spillovers.
  - Scenario considers roles and interactions for New Zealand’s monetary and fiscal policies.

### Net migration effects from a China slowdown (New Zealand)
- Context and assumption:
  - Part of services exports (education) consumed by temporary residents; students often obtain work permits after graduation.
  - Currently, 17 percent of net migration comes from China in New Zealand.
  - Scenario assumption: New Zealand’s population is 0.1 percentage points lower per year for 10 years — approximately 40 percent of the share of New Zealand’s net migration inflow coming from China.
- Effects through lower net migration:
  - Decrease in productive capacity and increase in wage pressures.
  - Investment weaker by 0.2 percent (short term) to 0.7 percent (long term) relative to the scenario without the net migration effects.
  - Household consumption 1.8 percent lower instead of 0.9 percent.
  - Short-term current account deficit decreases before long-term re-equilibration via the REER.
  - Real GDP 0.7 percent lower than baseline in the long term.
  - REER would depreciate only 0.9 percent (less depreciation because of stronger real wages relative to the case without net migration changes).
  - Services exports 1.6 percent lower relative to baseline (compared to 0.7 percent under the case without changes in net migration).

### Interaction of monetary and fiscal policy under the ELB (New Zealand)
- Context:
  - RBNZ policy rate is at 1 percent.
  - Effective lower bound (ELB) could constrain monetary policy if a major risk materializes.
- Fiscal response scenarios when policy rate at the ELB:
  - Two pairs of fiscal instruments considered (each changed by 0.5 percent of GDP relative to their original paths for five years):
    - Lower Multipliers, Quicker to Deploy: Increased government consumption spending and a GST rate cut.
    - Higher Multipliers, Slower to Deploy: Increased government infrastructure investment and GST rebates targeted to lower-income households.
  - Assumption: Monetary authority does not increase the overnight cash rate even if inflation enters its target range later.
- Common outcomes of both fiscal packages:
  - Inflation rises by between 0.5 to 0.8 percentage points by the fifth year.
  - Government-debt-to-GDP ratio increases by only between 2.0 to 2.5 percent of GDP after 5 years.
  - REER depreciates between 0.4 and 0.6 percent more than the case without fiscal stimulus (a “fiscal devaluation”).
  - Leakage to abroad: current account deficit increases between 0.2 and 0.3 percentage points of GDP due to higher imports.
- Lower-multiplier package:
  - Real GDP multiplier of 0.7 on impact.
  - Real GDP peaks at 1.0 percent higher in the fifth year relative to the slowdown constrained by the ELB without fiscal response.
  - GST rate cut mainly affects lower-income, non-saving households; little effect on higher-income savers’ consumption.
- Higher-multiplier package:
  - Real GDP multiplier of 1.1 on impact.
  - Real GDP peaks at 1.6 percent higher in the fifth year relative to the slowdown constrained by the ELB without fiscal response.
  - Public infrastructure raises productivity over medium-to-long term, encouraging private investment.
  - Targeted GST rebates likely to be spent by beneficiaries more than a general GST cut.
  - Risk that infrastructure investment cannot be scaled up as rapidly as depicted.
- Multilateral reinforcement:
  - Simultaneous fiscal stimulus elsewhere in Asia and Australia would reinforce New Zealand’s stimulus through trade spillovers, enabling lower real interest rates and greater REER depreciation.

### Spillovers from Australia and interaction with net migration
- Australia illustrative slowdown (shocks and outcomes):
  - Australia real GDP growth lower by about 3 percentage points on impact and continues negative, subtracting around 0.5 percentage points off growth for another 9 years.
  - Real GDP 9.3 percent lower in the long term.
  - Over 20 percent of Australia’s long-term decline attributable to lower population growth from lower net migration.
  - Short-term RBA response: 2 percent REER depreciation before being reversed; long-term REER appreciation of 4.3 percent.
  - Demand for tourism and education services down 5.9 percent on impact, falling to 9.8 percent lower before settling at 4.7 percent lower.
  - Agricultural imports from New Zealand: about 0.2 percent of GDP short term, approaching 0.3 percent long term.
- Spillovers to New Zealand from Australian slowdown:
  - Comparison: Australia long-term GDP decline 9.3 percent vs China 11.9 percent in the earlier scenario.
  - New Zealand export impacts:
    - Services exports about 0.4 percent lower (0.6 percent in the long term).
    - Goods exports roughly 1.3 percent lower (0.4 percent in the long term).
    - Net agricultural exports broadly unchanged.
  - Aggregate effects on New Zealand:
    - Real GDP 0.1 percent lower in the short and long terms.
    - Consumption falls by 0.6 percent.
    - Short-term 0.1 percent of GDP deterioration in current account.
    - REER 0.2 percent lower on impact and 0.4 percent lower in the long term.
- How net migration from Australia could improve New Zealand outcomes (illustrative):
  - Attribution: 20 percent of Australia’s lower population growth shifts to higher net migration to New Zealand.
  - Effects:
    - Real GDP expands steadily at about 0.2 percent per year, reaching 2.0 percent higher than baseline in the long term.
    - Short-term benefits concentrated in the domestic sector; external sector also benefits in the long term as productive capacity expands.
    - REER would depreciate by 1.5 percent relative to baseline (instead of 0.4 percent).
    - Investment peaks at 2.0 percent higher short term and stabilizes at 1.6 percent higher long term.
    - Household wealth and consumption increase: 2.2 percent higher consumption.
    - Current account deficit increases by 0.5 percent of GDP (instead of only 0.1 percent of GDP).

### Spillovers to New Zealand’s agriculture sector
- Agriculture shock scenarios considered:
  - Permanent global (excluding New Zealand) supply increase or demand decrease of 10 percent for agricultural goods.
  - Domestic scenario: sustained drought in New Zealand lowering agricultural output by about 6 percent for 2 years before recovery.
- Global supply or demand shock (outside New Zealand) outcomes:
  - Long-term global agricultural price 2.7 percent lower.
  - From New Zealand perspective under global supply shock:
    - Negative wealth shock from lower prices.
    - Consumption weaker: 0.5 percent in the long term, and 1.0 percent in the short term.
    - Households dissave in the short term.
    - Current account deficit higher by 0.5 percent of GDP and REER depreciation of 1.2 percent.
  - Under the global demand shock:
    - Nearly unchanged current account deficit and REER depreciation of 0.7 percent.
  - Long-term real GDP for New Zealand roughly unchanged after initial short-term impacts; REER depreciation raises non-agricultural exports by about 1.3 percent.
- Domestic drought in New Zealand:
  - Real GDP loss smaller on impact: 0.4 percent.
  - External sector much weaker from lower exports.
  - Current account deficit higher by 0.8 percent of GDP.
  - Little impact on global agricultural price because New Zealand is a small global player.

### Conclusions on external risks, exchange rate, migration, and fiscal policy
- Two mitigating factors likely to reduce economic impact of external shocks:
  - Flexible exchange rate regime is a reliable shock absorber and automatic stabilizer for real GDP, though it induces a rebalancing between the domestic and external sectors.
  - Net migration flows can reduce the negative impact of lower external demand in some circumstances (for example, a growth slowdown in Australia), but net migration is not a reliable stabilizer because its magnitude is subject to many factors and it can also reinforce negative impacts (for example, a growth slowdown in China).
- Fiscal policy:
  - Fiscal stimulus can be provided at relatively small and manageable cost to the already-low government debt to GDP ratio.
  - At the current juncture, fiscal policy might need to provide the bulk of policy support against negative shocks, as monetary policy might be ineffective if it has become constrained by an effective lower bound on the monetary policy interest rate.

### Annex I — Key Assumptions Underlying the Simulations (ANZIMF)
- All agents have perfect foresight.
- Model non-linearities: financial accelerator and potential monetary policy non-linearities at the ELB; otherwise approximately linear for small shocks.
- All countries share the same economic structures, differing only by parameterization and calibration.
- Baseline calibration consistent with 2017 for great ratios to GDP, and 2016 and 2017 for services data.
- Real exchange rate is a “jumper,” adjusting immediately in the first year to shocks, following a forward-looking, risk-adjusted uncovered interest rate parity condition; net foreign asset dynamics solve endogenously within the OLG framework.
- Agriculture sector is a global market with one global price.
- China assumed to have a flexible exchange rate with no capital controls.
- No substantial financial market channels beyond the financial accelerator; assumes complete domestic ownership of firms; all net foreign asset positions denominated in U.S. dollars.
- Model at annual frequency, with some loss of detail in short-run dynamics (particularly first-year investment).

### Scenario specification details (selected)
- Growth Slowdown in China — Scenario shocks (four shocks):
  1. Lower productivity:
     - Permanent 5 percent reduction in tradables and nontradables productivity.
     - Phased in as a -2 percentage points on productivity growth in year 1, and -1 percentage point on growth in years 2 through 4.
  2. Lower housing wealth:
     - 10 percent decline on impact in year 1 in nontradable sector net worth.
  3. Increased corporate risk premia:
     - Permanent 0.5 percentage point increase in the corporate risk premia for both tradable- and nontradable-producing firms.
     - Phased in by year 4, declining from an initial 2 percentage point increase on impact in year 1.
  4. Lower agricultural goods demand:
     - Permanent 5 percent reduction in demand for agricultural goods.
     - Phased in over 5 years.
- Additional net migration effect in New Zealand:
  - Permanently fewer migrants from China: 0.1 percent reduction in labor force growth for 10 years in New Zealand, so the New Zealand population is permanently 1.0 percent lower.
- Interaction of fiscal and monetary policies in New Zealand:
  - The overnight cash rate is assumed unchanged for 5 years and expected each year to be unchanged until the end of the following year.
  - Two configurations of fiscal stimulus:
    1. Higher-multiplier fiscal stimulus:
       - 5-year, 0.25 percent of baseline GDP higher spending on government infrastructure investment.
       - 5-year 0.25 percent of baseline GDP rebate of GST revenues to non-saving, lower-income households.
    2. Lower-multiplier fiscal stimulus:
       - 5-year, 0.25 percent of baseline GDP higher spending on government consumption (wages, salaries and other operating expenses).
       - 5-year cut in the general GST rate such that government revenues are 0.25 percent of baseline GDP lower each year.

### Annex II — New Zealand’s Fiscal Multipliers in ANZIMF
- ANZIMF fiscal instruments (seven): government consumption, government investment (infrastructure), lumpsum transfers to all households, lumpsum transfers targeted to LIQ households, goods and services tax (GST), personal income tax (PIT), corporate income tax (CIT).
- Fiscal multipliers computed from change in real GDP; two monetary policy assumptions: normal conduct or OCR held fixed for two years.
- Infrastructure investment raises productivity; calibrated using output elasticity with respect to infrastructure capital of 0.170.
- General ordering and effects:
  - Spending generally provides larger multipliers than tax cuts.
  - Government absorption multipliers most effective.
  - Government investment (infrastructure) more effective than government consumption due to productivity effects.
  - Lumpsum transfers targeted to LIQ households are effective because fully consumed immediately.
  - GST affects consumption contemporaneously for all households.
  - PIT affects all households, but saving households smooth the extra income; only liquidity-constrained households spend it immediately.
  - CIT has small effects under normal conduct; when OCR is held fixed, CIT multiplier can exceed GST and PIT.
- ANZIMF Fiscal Multipliers for New Zealand (table values preserved exactly):
  - Normal Conduct of Monetary Policy
    - Government Consumption: 0.71 (First Year), 0.61 (Second Year)
    - Government Investment: 0.88 (First Year), 0.85 (Second Year)
    - Transfers to All Households: 0.10 (First Year), 0.08 (Second Year)
    - Transfers to LIQ Households Only: 0.38 (First Year), 0.35 (Second Year)
    - Goods and Services Tax: 0.27 (First Year), 0.26 (Second Year)
    - Personal Income Tax: 0.24 (First Year), 0.23 (Second Year)
    - Corporate Income Tax: 0.18 (First Year), 0.21 (Second Year)
  - Overnight Cash Rate Held Fixed for Two Years
    - Government Consumption: 0.83 (First Year), 0.67 (Second Year)
    - Government Investment: 1.03 (First Year), 0.93 (Second Year)
    - Transfers to All Households: 0.12 (First Year), 0.09 (Second Year)
    - Transfers to LIQ Households Only: 0.45 (First Year), 0.39 (Second Year)
    - Goods and Services Tax: 0.31 (First Year), 0.29 (Second Year)
    - Personal Income Tax: 0.29 (First Year), 0.26 (Second Year)
    - Corporate Income Tax: 0.39 (First Year), 0.37 (Second Year)
- When the RBNZ accommodates fiscal stimulus, multipliers are larger:
  - Multipliers roughly 15 to 20 percent larger (over 100 percent larger for the CIT) than with normal conduct.
- New Zealand’s multipliers are generally consistent in ordering with other countries and models but smaller in magnitude because New Zealand is a small, open economy that uses a larger share of fiscal stimulus to buy foreign relative to domestic goods and services.

### Consumption-Equivalent Welfare (CEW) in New Zealand
- CEW approach:
  - Maps welfare aspects into a single consumption-equivalent index; includes consumption, life expectancy, leisure, and inequality; extensions include greenhouse gas emission costs and sustainability.
- New Zealand’s position in 2017:
  - CEW was 83 percent of the U.S. level in 2017 while income was 68 percent of the U.S. level.
  - New Zealand scores better than the United States on life expectancy and inequality, behind the United States on consumption and leisure, and very close to the U.S. level on greenhouse gas (GHG) emissions (GHG metric is emissions per unit of consumption; GHG data for 2012).
- Evolution 2007–2017 (annual percentage change, Table 3):
  - 2007-17: Welfare 2.3, Income 1.6, Life exp. 0.5, Cons. 1.6, Leisure -0.2, Inequality 0.5, GHG 0.0
  - 2007-12: Welfare 1.3, Income 1.4, Life exp. 0.3, Cons. 1.4, Leisure -0.3, Inequality -0.1, GHG -0.1
  - 2012-14: Welfare 1.1, Income 2.1, Life exp. 0.1, Cons. 1.4, Leisure -0.5, Inequality 0.0, GHG 0.2
  - 2014-17: Welfare 4.9, Income 1.6, Life exp. 1.1, Cons. 1.9, Leisure 0.0, Inequality 1.9, GHG 0.0
- Drivers and interpretation:
  - Life expectancy: improvement of 1.5 years in life expectancy at birth from 2007-2017 yielded growth of 0.5 percent per year in welfare.
  - Consumption growth outpaced income growth in 2014-17 and contributed importantly to welfare gains.
  - Inequality changes: New Zealand’s Gini rose from 30.94 to 33.81 while U.S. Gini rose from 26.71 to 41.67.
  - Labor input and productivity: New Zealand has relatively higher labor input to produce a lower level of income, indicating need to improve productivity.
- Policy implications:
  - Income growth remains key to welfare improvements; policies supporting equitable and inclusive growth are important.
  - Productivity should be recognized explicitly as a third key component alongside income and consumption in the living standards framework (LSF).
  - Improvements in life expectancy (health service delivery, education, safety) have important welfare impact.
  - Further empirical mapping needed to integrate wellbeing indicators into the CEW framework.

### Macroprudential policy, monetary policy interactions, and financial stability (New Zealand)
- Framework and interactions:
  - Macroprudential policy is "the primary policy tool for managing financial risks," but financial stability is also affected by other policies.
  - Complementarities and tensions exist among monetary, macroprudential, microprudential, fiscal, tax, and competition policies.
  - Monetary policy can play a role in financial stability when macroprudential policy is not fully effective, provided price stability is not compromised.
- Recent dynamics and vulnerabilities:
  - Inflation subdued and below the mid-point of the RBNZ’s target range for most of the period since 2011.
  - House prices "have risen sharply in real terms over the past 8 years or so."
  - Drivers include persistently low inflation, very low interest rates, and supply-demand imbalances (particularly in Auckland).
  - Concentrated banking exposure to residential mortgages and high housing-related household debt.
- LVR restrictions and effects (exact statistics preserved):
  - "The share of mortgages outstanding with LVR of above 80 percent has declined to 7 percent in end-2018 from about 20 percent in 2013 (RBNZ, 2019)."
  - "The share of new mortgage lending to investors has also reduced to 18 percent in end-2018 from the peak of 35 percent in mid-2016."
  - Easing in household vulnerabilities allowed RBNZ to ease restrictions effective January 2018 and January 2019.
  - Remaining concerns: households still vulnerable to adverse shocks given high household debt and high house prices; "More active use of macroprudential policy should be considered."
- Macroprudential framework (MoU and tools):
  - RBNZ mandate from Reserve Bank of New Zealand Act 1989: "promoting the maintenance of a sound and efficient financial system."
  - Memorandum of understanding (MoU) between RBNZ and Minister of Finance (signed May 2013) clarifies operational process; RBNZ initiates macroprudential action after consultation with Treasury and Minister.
  - Single-regulator model: RBNZ is the single prudential regulator.
  - MoU-specified tools: countercyclical capital buffer (CCyB), adjustments to the minimum core funding ratio (CFR), sectoral capital requirements (SCR), and temporary restrictions on high loan-to-value ratio (LVR) residential mortgage lending.
  - "LVR restrictions is the only instrument that is currently turned on."
  - RBNZ acknowledges efficiency costs and possible distributional consequences of instruments such as LVR or DTI restrictions.
- Communication and coordination challenges:
  - Financial stability as a secondary consideration has created policy communication challenges; implications for clarity in Monetary Policy Statements.
  - IMF staff view: New Zealand follows the separation school; coordination occurs within RBNZ, enabling internalization of trade-offs.
  - Recommendations: better communication on interactions between monetary and macroprudential policies via Monetary Policy Statements and Financial Stability Reviews; possible role for joint committee of the Council of Financial Regulators (CoFR) or an expanded remit.
- Policy recommendations and conclusions:
  - "Price stability and supporting maximum sustainable employment should remain the primary monetary policy objectives for the RBNZ."
  - Strengthen macroprudential framework to support monetary policy focus.
  - IMF 2017 FSAP recommended adjustments in transparency and governance and broadening toolkit to include DTI or DSTI instruments.
  - LVRs effective in slowing house price growth and reducing high-LVR mortgages but less effective in limiting high household debt exposure or ensuring debt service capacity.
  - Policy recommendation: include limits on DTI and DSTI to complement LVR restrictions.
  - Communication recommendation: "A more explicit discussion of financial stability considerations, in Monetary Policy Statements or the Financial Stability Review, could reduce uncertainty, and improve the understanding of the monetary policy strategy and its outcome."

*Italic: Source — IMF staff calculations and descriptive text from the content unit 1nzlea2019003.*

### References  _____________________________________________________________________________ 21

### 1nzlea2019003 - References

### ANZIMF model and external linkages
- ANZIMF is the Australia-New Zealand Integrated Monetary and Fiscal Model, an annual, multi-region, micro-founded general equilibrium model based on GIMF.
- Model features preserved exactly as described:
  - Consumption dynamics driven by higher-income, saving households and non-saving, lower-income households (LIQ).
  - Non-Ricardian properties via households treating government bonds as wealth; non-saving households consume all income each year.
  - Private investment relies on the Bernanke-Gertler-Gilchrist (1999) financial accelerator.
  - Government instruments: government consumption, infrastructure spending, general lumpsum transfers, lumpsum transfers targeted to LIQ households, taxes on consumption (GST), personal income (PIT), corporate income (CIT).
  - Separate sectors for agriculture and for services (tourism and education).
  - Agricultural sector: U.S. dollar global agriculture price determined on global market; short- and long-term price elasticities of supply are 0.40.
  - Services sector: produced from tradable and nontradable goods; services included exclusively in consumption.
  - Monetary policy under a CPI inflation targeting regime using an interest rate function returning expected inflation to target over several years.
  - Fiscal policy aims to maintain a debt target (expressed as a deficit target) using available instruments.

### Major external linkages for New Zealand (as framed)
- Three channels examined:
  - Agricultural goods trade: New Zealand is a large-scale agricultural exporter; agricultural exports account for over 13 percent of New Zealand’s GDP.
  - Services trade: New Zealand is a large exporter of tourism and education services; export links with Australia strongest for services, with China more for agricultural goods.
  - Net migration: near record-high levels in recent years; students (many from Australia and China) staying as permanent residents; flows from Australia include returning New Zealand citizens.

### Growth slowdown in China — scenario design and outcomes in China
- Scenario context: global trade tensions disrupt structural reform in China.
- Scenario assumptions (as stated):
  - Lower productivity growth of about 0.5 percent per year for 10 years, reducing economy-wide productivity levels by 5 percent in the long term.
  - Firms face higher risk premiums, an increase of 0.5 percentage points relative to baseline.
  - House prices in major urban centers fall by 10 percent over two years.
  - Demand for imported agricultural goods declines by about 0.5 percent per year, summing to levels that are 9 percent lower in the long term.
- Quantified outcomes for China:
  - Real GDP growth about 1 percentage point lower than in the baseline in the short term.
  - Real GDP growth about 0.6 percent lower for nine years.
  - In the long term, the level of real GDP would be 11.9 percent lower relative to the baseline.
  - Two-thirds of the long-term decline attributable to lower productivity.
  - Inflation in tradable goods prices 1.0 percent lower by the third year and returns to baseline after ten years.
  - Household consumption growth around 0.2 to 0.5 percentage points weaker than real GDP growth.
  - Global agricultural prices lower by almost 1 percent on impact and by 2.1 percent in the long term.

### Spillovers to New Zealand from the China slowdown
- General effects:
  - Strong trade-channel spillovers via lower global agricultural prices and reduced demand for tourism and education services.
  - Real depreciation of the New Zealand dollar mitigates export impacts over time.
- Quantified NZ outcomes (deviations from WEO-consistent forecasts):
  - Tourism and education exports 1.6 percent lower in the short term.
  - Tourism and education exports 1.0 percent lower in the long term.
  - Goods exports 1.1 percent longer in the short term and 0.5 percent higher in the long term. 
  - Global agricultural-price-driven wealth shock leads to a depreciated REER.
  - Consumption 0.9 percent lower relative to baseline in the long term.
  - Real GDP contracts by 0.2 percent on impact and is broadly unchanged relative to baseline in the long term.
- Additional channels considered:
  - Net migration effects are analyzed as an exacerbating factor to the China slowdown spillovers.
  - The scenario also considers potential roles and interactions for New Zealand’s monetary and fiscal policies.

*Italic: Source — IMF staff calculations and descriptive text from the content unit 1nzlea2019003.*

### 9.      A growth slowdown in China could have the additional impact of reducing Chinese

### 1nzlea2019003 - 9. A growth slowdown in China could have the additional impact of reducing Chinese

### Net migration effects from a China growth slowdown
- Part of New Zealand’s services exports (education services) is consumed by temporary residents; students often obtain work permits after graduation.
- Currently, 17 percent of net migration comes from China in New Zealand.
- Scenario assumption: New Zealand’s population is 0.1 percentage points lower per year for 10 years — approximately 40 percent of the share of New Zealand’s net migration inflow coming from China.
- Effects on New Zealand through lower net migration:
  - Decrease in productive capacity and increase in wage pressures.
  - Investment weaker by 0.2 percent (short term) to 0.7 percent (long term) relative to the scenario without the net migration effects.
  - Household consumption 1.8 percent lower instead of 0.9 percent.
  - Short-term current account deficit decreases before long-term re-equilibration via the REER.
  - Real GDP 0.7 percent lower than baseline in the long term.
  - REER would depreciate only 0.9 percent (less depreciation because of stronger real wages relative to the case without net migration changes).
  - Services exports 1.6 percent lower relative to baseline (compared to 0.7 percent under the case without changes in net migration).

### Interaction of monetary and fiscal policy under the ELB
- Context:
  - Reserve Bank of New Zealand (RBNZ) policy rate is at 1 percent.
  - Effective lower bound (ELB) could constrain monetary policy if a major risk materializes.
- Fiscal response scenarios examined when policy rate at the ELB:
  - Two pairs of fiscal instruments are considered (each changed by 0.5 percent of GDP relative to their original paths for five years):
    - Lower Multipliers, Quicker to Deploy: Increased government consumption spending and a GST rate cut.
    - Higher Multipliers, Slower to Deploy: Increased government infrastructure investment and GST rebates targeted to lower-income households.
  - Assumption: Monetary authority does not increase the overnight cash rate even if inflation enters its target range later.
- Common outcomes of both fiscal packages:
  - Inflation rises by between 0.5 to 0.8 percentage points by the fifth year.
  - Government-debt-to-GDP ratio increases by only between 2.0 to 2.5 percent of GDP after 5 years.
  - REER depreciates between 0.4 and 0.6 percent more than the case without fiscal stimulus (a “fiscal devaluation”).
  - Leakage to abroad: current account deficit increases between 0.2 and 0.3 percentage points of GDP due to higher imports.
- Lower-multiplier package:
  - Real GDP multiplier of 0.7 on impact.
  - Real GDP peaks at 1.0 percent higher in the fifth year relative to the slowdown constrained by the ELB without fiscal response.
  - GST rate cut mainly affects lower-income, non-saving households; little effect on higher-income savers’ consumption.
- Higher-multiplier package:
  - Real GDP multiplier of 1.1 on impact.
  - Real GDP peaks at 1.6 percent higher in the fifth year relative to the slowdown constrained by the ELB without fiscal response.
  - Public infrastructure raises productivity over medium-to-long term, encouraging private investment.
  - Targeted GST rebates likely to be spent by beneficiaries more than a general GST cut.
  - Risk that infrastructure investment cannot be scaled up as rapidly as depicted.
- Multilateral reinforcement:
  - Simultaneous fiscal stimulus elsewhere in Asia and Australia would reinforce New Zealand’s stimulus through trade spillovers, enabling lower real interest rates and greater REER depreciation.

### Spillovers from Australia and the interaction with net migration
- Australia illustrative slowdown:
  - Australia real GDP growth lower by about 3 percentage points on impact and continues negative, subtracting around 0.5 percentage points off growth for another 9 years.
  - Real GDP 9.3 percent lower in the long term.
  - Over 20 percent of Australia’s long-term decline attributable to lower population growth from lower net migration.
  - Short-term RBA response: 2 percent REER depreciation before being reversed; long-term REER appreciation of 4.3 percent.
  - Demand for tourism and education services down 5.9 percent on impact, falling to 9.8 percent lower before settling at 4.7 percent lower.
  - Agricultural imports from New Zealand: about 0.2 percent of GDP short term, approaching 0.3 percent long term.
- Spillovers to New Zealand from the Australian slowdown:
  - Comparison: Australia long-term GDP decline 9.3 percent vs China 11.9 percent in the earlier scenario.
  - New Zealand export impacts:
    - Services exports about 0.4 percent lower (0.6 percent in the long term).
    - Goods exports roughly 1.3 percent lower (0.4 percent in the long term).
    - Net agricultural exports broadly unchanged (weaker Australian demand for NZ agriculture than China).
  - Aggregate effects on New Zealand:
    - Real GDP 0.1 percent lower in the short and long terms.
    - Consumption falls by 0.6 percent.
    - Short-term 0.1 percent of GDP deterioration in current account.
    - REER 0.2 percent lower on impact and 0.4 percent lower in the long term.
- How net migration from Australia could improve outcomes for New Zealand:
  - Illustrative attribution: 20 percent of Australia’s lower population growth shifts to higher net migration to New Zealand.
  - Effects:
    - Real GDP expands steadily at about 0.2 percent per year, reaching 2.0 percent higher than baseline in the long term.
    - Short-term benefits concentrated in the domestic sector; external sector also benefits in the long term as productive capacity expands.
    - REER would depreciate by 1.5 percent relative to baseline (instead of 0.4 percent).
    - Investment peaks at 2.0 percent higher short term and stabilizes at 1.6 percent higher long term.
    - Household wealth and consumption increase: 2.2 percent higher consumption.
    - Current account deficit increases by 0.5 percent of GDP (instead of only 0.1 percent of GDP).

### Spillovers to New Zealand’s agriculture sector
- Global agricultural shock scenarios considered:
  - Permanent global (excluding New Zealand) supply increase or demand decrease of 10 percent for agricultural goods.
  - Domestic scenario: sustained drought in New Zealand lowering agricultural output by about 6 percent for 2 years before recovery.
- Global supply or demand shock (outside New Zealand):
  - Long-term global agricultural price 2.7 percent lower.
  - From New Zealand perspective:
    - Negative wealth shock from lower prices.
    - Consumption weaker: 0.5 percent in the long term, and 1.0 percent in the short term for the global supply shock.
    - Households dissave in the short term.
    - Current account deficit higher by 0.5 percent of GDP and REER depreciation of 1.2 percent under the global supply shock.
    - Under the global demand shock: nearly unchanged current account deficit and REER depreciation of 0.7 percent.
  - Long-term real GDP for New Zealand roughly unchanged after initial short-term impacts; REER depreciation raises non-agricultural exports by about 1.3 percent.
- Domestic drought in New Zealand:
  - Real GDP loss smaller on impact: 0.4 percent.
  - External sector much weaker from lower exports.
  - Current account deficit higher by 0.8 percent of GDP.
  - Little impact on global agricultural price because New Zealand is a small global player.

*Source: IMF staff calculations, as presented in the provided chapter excerpt.*

### 0.4 percent REER, depreciation, and there would be no significant external-domestic sector

### 0.4 percent REER, depreciation, and there would be no significant external-domestic sector rebalancing

### Conclusions
- The current set of external risks could be extremely damaging to New Zealand, but two factors would likely mitigate the economic impact:
  - The flexible exchange rate regime is a reliable shock absorber and automatic stabilizer for real GDP, though it induces a rebalancing between the domestic and external sectors.
  - Net migration flows can reduce the negative impact of lower external demand in some circumstances (for example, a growth slowdown in Australia), but net migration is not a reliable stabilizer because its magnitude is subject to many factors and it can also reinforce negative impacts (for example, a growth slowdown in China).
- Fiscal policy could offset some short-term adjustment costs:
  - Fiscal stimulus can be provided at relatively small and manageable cost to the already-low government debt to GDP ratio.
  - At the current juncture, fiscal policy might need to provide the bulk of policy support against negative shocks, as monetary policy might be ineffective if it has become constrained by an effective lower bound on the monetary policy interest rate.

*Source: International Monetary Fund.*

### Annex I — Key Assumptions Underlying the Simulations (ANZIMF)
- All agents have perfect foresight.
- The model has non-linearities in the financial accelerator and potential non-linearities in monetary policy when encountering the effective lower bound (ELB) or using monetary accommodation; otherwise approximately linear for small shocks.
- All countries in ANZIMF share the same economic structures, differing only by parameterization and calibration.
- Baseline calibration consistent with 2017 for great ratios to GDP (capital stock, government debt and deficit, net foreign assets and current account balance), and 2016 and 2017 for services data.
- The real exchange rate is a “jumper,” adjusting immediately in the first year to shocks, following a forward-looking, risk-adjusted uncovered interest rate parity condition; net foreign asset dynamics solve endogenously within the OLG framework.
- The agriculture sector is a global market with one global price.
- China is assumed to have a flexible exchange rate with no capital controls.
- No substantial financial market channels beyond the financial accelerator; assumes complete domestic ownership of firms; all net foreign asset positions denominated in U.S. dollars.
- The model is at an annual frequency, with some loss of detail in short-run dynamics (particularly first-year investment).

### Risk Scenario Assumptions
- Risk scenarios originate in China; Australia and the rest of the world interact with spillovers direct, via third countries, or via the global agricultural goods market.

### Growth Slowdown in China — Scenario shocks (four shocks)
1. Lower productivity:
   - Permanent 5 percent reduction in tradables and nontradables productivity.
   - Phased in as a -2 percentage points on productivity growth in year 1, and -1 percentage point on growth in years 2 through 4.
2. Lower housing wealth:
   - 10 percent decline on impact in year 1 in nontradable sector net worth, to proxy for the permanent fall in the value of the housing stock.
3. Increased corporate risk premia:
   - Permanent 0.5 percentage point increase in the corporate risk premia for both tradable- and nontradable-producing firms.
   - Phased in by year 4, declining from an initial 2 percentage point increase on impact in year 1.
4. Lower agricultural goods demand:
   - Permanent 5 percent reduction in demand for agricultural goods.
   - Phased in over 5 years.
- Additional net migration effect in New Zealand:
  - Permanently fewer migrants from China: 0.1 percent reduction in labor force growth for 10 years in New Zealand, so the New Zealand population is permanently 1.0 percent lower.
- Interaction of fiscal and monetary policies in New Zealand:
  - The overnight cash rate (RBNZ’s monetary policy rate / ANZIMF short-term interest rate) is assumed unchanged for 5 years and expected each year to be unchanged until the end of the following year.
  - Two configurations of fiscal stimulus:
    1. Higher-multiplier fiscal stimulus:
       - 5-year, 0.25 percent of baseline GDP higher spending on government infrastructure investment.
       - 5-year 0.25 percent of baseline GDP rebate of GST revenues to non-saving, lower-income households.
    2. Lower-multiplier fiscal stimulus:
       - 5-year, 0.25 percent of baseline GDP higher spending on government consumption (wages, salaries and other operating expenses).
       - 5-year cut in the general GST rate such that government revenues are 0.25 percent of baseline GDP lower each year.

### Growth Slowdown in Australia — Scenario shocks (four shocks)
1. Lower net migration:
   - Permanent 2.5 percent reduction in labor force.
   - Phased in over 10 years at 0.25 percentage points per year.
2. Lower productivity:
   - Permanent 2.5 percent reduction in tradables and nontradables productivity.
   - Phased in over 10 years as a -0.25 percentage points per year.
3. Lower housing wealth:
   - 20 percent decline on impact in year 1 in nontradable sector net worth, to proxy for the permanent fall in the value of the housing stock.
4. Increased corporate risk premia:
   - Immediate and permanent 0.5 percentage point increase in the corporate risk premia for both tradable- and nontradable-producing firms.
- Additional net migration effect in New Zealand:
  - Permanently more migrants from Australia: 0.26 percent increase in labor force growth for 10 years in New Zealand, so the New Zealand population is permanently 2.6 percent higher.

### Agriculture Sector — Scenarios (three alternative single shocks)
1. Higher global agriculture supply:
   - Immediate and permanent 10 percent increase in the global supply of agricultural goods (outside New Zealand) by increasing the endowment (long-term supply curve).
2. Lower global agriculture demand:
   - Immediate and permanent 10 percent reduction in the global demand for agricultural goods (outside New Zealand) by reducing consumer preference parameters for agricultural goods.
3. Drought in New Zealand:
   - Supply of agricultural goods in New Zealand reduced by 6.25 percent in years 1 and 2.
   - Long-term supply returns to previous levels by year 6.
   - Short-term elasticity of agricultural goods supply set to 0 in years 1 and 2 (no short-term response to price); elasticity increased gradually, returning to original value by year 6.

### Annex II — New Zealand’s Fiscal Multipliers in ANZIMF
- ANZIMF fiscal instruments (seven): government consumption, government investment (infrastructure), lumpsum transfers to all households, lumpsum transfers targeted to LIQ households, goods and services tax (GST), personal income tax (PIT), corporate income tax (CIT).
- Fiscal multipliers computed from change in real GDP in model simulations; consider two monetary policy assumptions: normal conduct (OCR set to keep inflation in range) or RBNZ accommodates fiscal stimulus by leaving OCR unchanged for two years.
- Infrastructure investment raises productivity; calibrated using output elasticity with respect to infrastructure capital of 0.170 (Bom and Ligthart, 2014).
- General ordering and effects:
  - Spending generally provides larger multipliers than tax cuts.
  - Government absorption multipliers most effective (entering real GDP directly and stimulating the rest of the economy).
  - Government investment (infrastructure) more effective than government consumption due to productivity effects.
  - Lumpsum transfers targeted to liquidity-constrained (LIQ) households are effective because they are fully consumed immediately by recipients.
  - GST affects consumption contemporaneously for all households.
  - PIT affects all households, but saving households smooth the extra income; only liquidity-constrained households spend it immediately.
  - CIT has small effects under normal conduct as firms plan long-term; when OCR is held fixed, CIT multiplier can exceed GST and PIT.

- ANZIMF Fiscal Multipliers for New Zealand (table values preserved exactly)

  - Normal Conduct of Monetary Policy
    - Government Consumption: 0.71 (First Year), 0.61 (Second Year)
    - Government Investment: 0.88 (First Year), 0.85 (Second Year)
    - Transfers to All Households: 0.10 (First Year), 0.08 (Second Year)
    - Transfers to LIQ Households Only: 0.38 (First Year), 0.35 (Second Year)
    - Goods and Services Tax: 0.27 (First Year), 0.26 (Second Year)
    - Personal Income Tax: 0.24 (First Year), 0.23 (Second Year)
    - Corporate Income Tax: 0.18 (First Year), 0.21 (Second Year)

  - Overnight Cash Rate Held Fixed for Two Years
    - Government Consumption: 0.83 (First Year), 0.67 (Second Year)
    - Government Investment: 1.03 (First Year), 0.93 (Second Year)
    - Transfers to All Households: 0.12 (First Year), 0.09 (Second Year)
    - Transfers to LIQ Households Only: 0.45 (First Year), 0.39 (Second Year)
    - Goods and Services Tax: 0.31 (First Year), 0.29 (Second Year)
    - Personal Income Tax: 0.29 (First Year), 0.26 (Second Year)
    - Corporate Income Tax: 0.39 (First Year), 0.37 (Second Year)

- When the RBNZ accommodates fiscal stimulus, multipliers are larger:
  - Multipliers roughly 15 to 20 percent larger (over 100 percent larger for the CIT) than with normal conduct.
- New Zealand’s multipliers are generally consistent in ordering with other countries and models but smaller in magnitude because New Zealand is a small, open economy that uses a larger share of fiscal stimulus to buy foreign relative to domestic goods and services.

### Quantifying Consumption-Equivalent Welfare in New Zealand
- New Zealand presented its first Wellbeing Budget on May 30th, 2019, integrating parts of the OECD Framework for Measuring Well-Being and Progress into public policy; the Treasury’s Living Standards Framework (LSF) focuses on four capitals (natural, human, social and financial/physical) across 12 wellbeing dimensions.
- Consumption-equivalent welfare (CEW) approach:
  - Puts economic value (in terms of consumption) on welfare aspects, allowing theoretically consistent aggregation into a single index.
  - Jones and Klenow (2016) developed an index including consumption, life expectancy, leisure, and inequality; Bannister and Mourmouras (2017) extend to include greenhouse gas emission costs and sustainability (adjusted net savings).
  - The CEW index maps into parts of New Zealand’s LSF dimensions.
- New Zealand’s position in 2017:
  - CEW was 83 percent of the U.S. level in 2017 while income was 68 percent of the U.S. level.
  - New Zealand scores better than the United States on life expectancy and inequality, behind the United States on consumption and leisure, and very close to the U.S. level on greenhouse gas (GHG) emissions (GHG metric is emissions per unit of consumption; GHG data for 2012).
- The CEW index is multiplicative across components in this formulation.
- Compared to peers, New Zealand’s lower overall welfare index reflects lower consumption and higher hours worked, while it compares favorably on life expectancy, inequality and greenhouse gas emissions.

*Source: International Monetary Fund.*

### 7.      How has New Zealand’s consumption-equivalent welfare index changed over time?

### 7.      How has New Zealand’s consumption-equivalent welfare index changed over time?

### Evolution of welfare relative to the United States (2007–2017)
- From 2007 to 2017 both welfare and income grew significantly relative to the U.S. level.
- From 2007-2014 the index moved parallel to the 45-degree line: welfare grew at the same pace as income.
- From 2014 to 2017 there was a significant improvement in both welfare and income, but welfare grew more quickly.
- Welfare growth was much higher than income growth in 2014-17 because of:
  - improvements in life expectancy,
  - higher consumption (which grew more quickly than income over this period),
  - declines in inequality.
- It is worth noting these movements are all relative to the U.S. level. For inequality, for example:
  - New Zealand’s Gini coefficient rose from 30.94 to 33.81,
  - U.S. inequality rose from 26.71 to 41.67.

### Quantitative growth rates (annual percentage change), 2007–2017 (Table 3)
- Variables reported: Welfare, Income, Life exp., Cons., Leisure, Inequality, GHG
- 2007-17: Welfare 2.3, Income 1.6, Life exp. 0.5, Cons. 1.6, Leisure -0.2, Inequality 0.5, GHG 0.0
- 2007-12: Welfare 1.3, Income 1.4, Life exp. 0.3, Cons. 1.4, Leisure -0.3, Inequality -0.1, GHG -0.1
- 2012-14: Welfare 1.1, Income 2.1, Life exp. 0.1, Cons. 1.4, Leisure -0.5, Inequality 0.0, GHG 0.2
- 2014-17: Welfare 4.9, Income 1.6, Life exp. 1.1, Cons. 1.9, Leisure 0.0, Inequality 1.9, GHG 0.0

### Drivers and interpretation
- Life expectancy: an improvement of 1.5 years in life expectancy at birth from 2007-2017 yielded growth of 0.5 percent per year in welfare.
- Consumption: consumption growth outpaced income growth in 2014-17 and contributed importantly to welfare gains.
- Inequality: declines in inequality supported welfare growth over 2014-17 (see relative Gini changes above).
- Labor input and productivity: New Zealanders have a relatively higher labor input to produce a lower level of income, underscoring the need to improve productivity.
  - Footnote on hours-worked measure: “The measure of hours worked per person per year has to be interpreted with care since it picks up the combined effects of hours per employed person, participation rates and employment rates. Nevertheless, it remains true that overall and labor productivity in New Zealand is well below OECD countries, a fact that has been attributed to distance from markets and low investment in innovation (de Serres and others., 2014).”

### Policy lessons and implications
- Income growth remains key to welfare improvements; policies that support equitable and inclusive growth are important.
  - New Zealand does relatively well on inclusion, with a Gini coefficient on a par with its peers, if somewhat below the higher-achieving Nordic countries.
  - The overall level of income and consumption is lower than peers.
- Productivity should be recognized explicitly as a third key component alongside income and consumption in the living standards framework (LSF).
- Improvements in life expectancy are important for welfare:
  - Even though New Zealand is at the upper edge of the distribution in life expectancy on average, sub-groups could still achieve important gains with significant welfare impact.
  - Improvements in health service delivery, education, and safety contribute to life expectancy gains.
- Further empirical mapping is needed to integrate New Zealand’s wellbeing indicators into the consumption-equivalent welfare framework:
  - Map health, education and skills, and safety indicators into improvements in life expectancy to quantify consumption-equivalent welfare benefits.
  - Map indicators on better jobs and earnings and time use into higher consumption and a better trade-off between consumption and leisure.
  - Assess the value of environmental benefits (e.g., contingent valuation studies) to evaluate environmental policies.

*Source: 7. How has New Zealand’s consumption-equivalent welfare index changed over time? (PDF chapter).*

### 8.      Macroprudential and other policies also influence financial stability. It is now well

### 8. Macroprudential and other policies also influence financial stability

### Interactions between macroprudential policy and other policies
- Macroprudential policy is "the primary policy tool for managing financial risks," but financial stability is also affected by other policies, both ex ante and ex post.
- Complementarities and tensions:
  - Monetary policy and macroprudential measures have complementarities and interactions.
  - Macroprudential and microprudential policies are often complementary, but tensions can arise in bad times: a macroprudential perspective may call for relaxation of regulatory requirements while a microprudential perspective may require tightening to protect banks’ balance sheets.
  - Taxes can affect asset prices, and tax policies can create biases that contribute to systemic risk.
  - Competition in the financial sector may create incentives for excessive risk-taking.
  - Effective and credible resolution regimes can reduce incentives to take excessive risks, thereby reducing the need for macroprudential intervention.

### Role of monetary policy relative to macroprudential policy
- Monetary policy can have a role in achieving financial stability objectives even if macroprudential policy is primary.
- Key findings:
  - A strong macroprudential framework with a broad range of tools can reduce the need for monetary policy to lean against adverse financial developments.
  - "The larger the reduction of financial vulnerabilities by macroprudential policy, the smaller the need for monetary policy to lean against emerging imbalances."
  - Macroprudential policy can reduce the likelihood of severe economic stress from financial instability and limit the chance that monetary policy gets stuck at the zero-lower bound.
  - Since macroprudential policy may not be fully effective, there are times when monetary policy should take account of financial stability considerations, provided it does not compromise price stability objectives.

### Monetary policy and financial stability in New Zealand (empirical context)
- Recent dynamics:
  - Inflation has remained subdued and has been below the mid-point of the RBNZ’s target range for most of the period since 2011.
  - House prices "have risen sharply in real terms over the past 8 years or so."
  - Drivers of house price increases include persistently low inflation, very low interest rates, and supply-demand imbalances (particularly in Auckland).
  - These increases occurred on the back of a trend increase in real house prices since the 1970s, a concentrated banking exposure to residential mortgages, and high, housing-related household debt.
  - Much of the housing-related macro-financial vulnerabilities were built up before the current economic expansion, were not unwound during the global financial crisis, and have increased further in recent years, albeit at a slower pace.

- Institutional framework and chronology:
  - The RBNZ’s policy objectives are to maintain a stable general level of prices and, since 2018, maximum sustainable employment.
  - In the 2012 Policy Targets Agreement, financial stability ("efficiency and soundness of the financial system") was introduced as a secondary consideration for the RBNZ to consider when pursuing policy targets; this consideration has been maintained in subsequent Agreements and the Remit for the MPC.
  - The RBNZ introduced a macroprudential policy toolkit in 2013.
  - Spencer (2014) termed New Zealand’s framework a "conditional coordination approach" in which the monetary policy targets agreement has financial stability as a secondary objective and macroprudential policy is required to have regards to its impact on monetary policy.
  - Bascand (2019a, 2019b) illustrated that macroprudential policy (e.g., loan-to-value ratios, LVRs, and countercyclical capital buffer, CCyB), prudential policy (e.g., capital buffers, liquidity policy), and crisis management measures (e.g., collateral standards, open bank resolution, minimum capital) could address different risks.

### Effects of LVR restrictions and remaining vulnerabilities
- LVR restrictions implemented since 2013 have lowered risks from high housing price inflation and high growth in household debt by:
  - Reducing the buildup of riskier loans with high LVRs, mitigating potential stress on banks’ balance sheets from negative equity if house prices were to fall.
  - Moderating accumulation of household debt with rising house prices.
- Exact statistics preserved:
  - "The share of mortgages outstanding with LVR of above 80 percent has declined to 7 percent in end-2018 from about 20 percent in 2013 (RBNZ, 2019)."
  - "The share of new mortgage lending to investors has also reduced to 18 percent in end-2018 from the peak of 35 percent in mid-2016."
- Policy adjustments:
  - The easing in the build-up of household vulnerabilities allowed the RBNZ to gradually ease restrictions on high LVR lending effective January 2018 and January 2019.
- Remaining concerns:
  - Structural vulnerabilities remain because households are still vulnerable to adverse shocks given high household debt and high house prices.
  - "More active use of macroprudential policy should be considered."

### Macroprudential policy framework in New Zealand (Box 2 highlights)
- Legal and institutional basis:
  - RBNZ’s mandate stems from the Reserve Bank of New Zealand Act 1989: "promoting the maintenance of a sound and efficient financial system."
  - Framework operationally clarified by a memorandum of understanding (MoU) between the RBNZ and the Minister of Finance (signed May 2013): RBNZ initiates any macroprudential policy action after consultation with the Treasury and Minister, though RBNZ has existing legal powers to use prudential tools cyclically.
  - The use of macroprudential policy is a topic under the phase two Review of the RBNZ Act.
- Single-regulator model:
  - RBNZ is the single prudential regulator with responsibilities and powers for supervision and macroprudential policies; under a full integration model, RBNZ’s central bank functions help inform macroprudential policies.
- MoU-specified tools:
  - Four macroprudential tools set out in the MoU: countercyclical capital buffer (CCyB), adjustments to the minimum core funding ratio (CFR), sectoral capital requirements (SCR), and temporary restrictions on high loan-to-value ratio (LVR) residential mortgage lending.
  - "LVR restrictions is the only instrument that is currently turned on."
- Acknowledged costs:
  - RBNZ has explicitly acknowledged efficiency costs and possibly unintended distributional consequences of instruments such as LVR or debt-to-income (DTI) restrictions, which may restrict home purchases by owner-occupiers, including first home buyers.

### Policy communication and coordination challenges
- Communication issues:
  - Introducing financial stability as a secondary consideration has created policy communication challenges; the role of financial stability in monetary policy decisions appears unclear because much communication focuses on traditional considerations.
  - Examples:
    - March 2014 OCR increase referenced inflationary pressures and inflation expectations but did not explicitly integrate financial stability trade-offs in MPS wording.
    - June 2015 MPS focused on low inflationary pressures and weakening demand when explaining OCR reduction, while noting that proposed LVR measures and government tax initiatives "should ease the impact of investor activity [on house prices]."
    - The interaction between inflation objectives and financial stability considerations was not explicitly discussed in MPS statements when policy rates were kept constant in 2017 and 2018.
- Recommendations for communication and coordination:
  - "Policy communication could focus more on implications of the interaction between monetary and macroprudential policies."
  - IMF staff view: New Zealand’s monetary policy framework follows the separation school; because coordination of monetary, macroprudential, and microprudential policies takes place within RBNZ, policy deliberations can internalize trade-offs.
  - Better communication on how interactions affected monetary policy decisions because of the secondary consideration for financial stability could enhance transparency and policy effectiveness.
  - The Monetary Policy Statements and the Financial Stability Reviews could be used as vehicles for such communication.
  - There could be a role for the joint committee of the Council of Financial Regulators (CoFR) — comprising RBNZ, Financial Market Authority, MBIE, and Treasury — or a separate committee to enhance coordination of monetary, macroprudential and fiscal policies.
  - Note: "CoFR only considers financial regulation. For it to consider monetary, financial and fiscal policy, its remit and membership would need to change."

### Recommendations and conclusions
- Primary objectives:
  - "Price stability and supporting maximum sustainable employment should remain the primary monetary policy objectives for the RBNZ."
  - Monetary policy generally is not an effective instrument for maintaining financial stability; seeking financial stability via monetary policy typically involves costly trade-offs with primary monetary objectives.
- Strengthening macroprudential framework:
  - A stronger macroprudential framework would support the monetary policy focus on price stability and maximum sustainable employment.
  - IMF’s 2017 FSAP recommended adjustments in transparency and governance and broadening the macroprudential toolkit to include DTI or DSTI instruments (IMF, 2017a).
  - LVRs have helped slow house price growth and reduce risky high-LVR mortgages, improving banks’ recovery value in the event of mortgage default.
  - LVRs are less effective in limiting high household debt exposure or ensuring debt service capacity—dimensions relevant for probability of default.
  - Policy recommendation: Include limits on DTI and DSTI in the toolkit to complement LVR restrictions and more directly reduce household exposure to high debt.
- Communication recommendation:
  - "A more explicit discussion of financial stability considerations, in Monetary Policy Statements or the Financial Stability Review, could reduce uncertainty, and improve the understanding of the monetary policy strategy and its outcome."

*Source: 1nzlea2019003 - 8. Macroprudential and other policies also influence financial stability. (IMF country chapter text).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2019/1nzlea2019003.pdf_