Inside New Zealand's little black box

The purpose of this study is to investigate the relative strengths of the channels through which monetary policy impacts upon the real sector in New Zealand. The three main channels that have been identified in the literature are the money channel, the exchange rate channel and the credit channel. A vector autoregresion (VAR) is employed and estimates the model over the period 1988 to 2002. The impulse response functions show that the movements in the exchange rate and money occur before the decline in output and prices. However the movements in credit are synchronised with the movements in output. Variance Decomposition reveals that in the short run the money channel and the credit channel is the most significant transmission vehicle. Moreover the money channel has a relatively stronger effect than the credit channel on the prices. However after one year the exchange rate channel is the dominant transmission channel to prices and output.UnpublishedAble, Andrew B., Bernanke, Ben S. (2001) "Macroeconomics" Addison Wesley Longman, Inc, 4 `11 edition Bacchetta, Philippe., Ballabriga, Fernando. (2000) "The Impact of Monetary Policy and Banks' Balance Sheets: Some International Evidence" Applied Financial Economics, No. 10, pp 10-26 Bernanke, Ben., Blinder, Alan. (1988) "Credit, Money and Aggregate Demand" American Economic Review, May, 78, 435-39 Bernanke, B S., Blinder, A S. (1992) "The Federal Funds Rate and the Channels of Monetary Transmission" American Economic Review, 82, pp 901-21 Bernanke, Ben S., Gertler, Mark. (1995) "Inside the Black Box: The Credit Channel of Monetary Policy Transmission" Journal of Economic Perspectives, Vol. 9, No. 4, pp 27-48 Bernanke, Ben S., Lown, Cara S. (1991) "The Credit Crunch" Brookings Papers on Economic Activity, Vol. 2, pp 205-39 Brischetto, Andrea., Voss, Graham. (1999) "A Structural Vector Autoregression Model of Monetary Policy in Australia" Reserve Bank of Australia, Research Discussion Paper 1999-11 Buttiglione, Luigi., Ferri, Giovanni. (1994) "Monetary Policy Transmission via Lending Rates in Italy: Any Lessons from Recent Experience?" Banca D'Italia, Temi di discussione, del Servizio Studi, No. 224 Citu, Florin. V. (2003) "A VAR Investigation of the Transmission Mechanism in New Zealand" Reserve Bank of New Zealand, Preliminary Draft (with permission) Dalziel, Paul., Lattimore, Ralph. (2001) "The New Zealand Macroeconomy" Oxford University Press, Fourth Edition Driscoll, John C. (1994) "Does Bank Lending Affect Output? Evidence from the U.S. States" Working Paper, Harvard University, Department of Economics Enders, Walter. (1995) "Applied Econometric Time Series" John Wiley & Sons, Inc, 1 st Edition Gertler, Mark., Gilchrist, Simon. (1993) "The role of Credit Market Imperfections in the Transmsion of Monetary Policy: Arguments and Evidence" Scandinavian Journal of Economics, Janurary, 95:1, pp 43-64 Gertler, Mark., Gilchrist, Simon. (1994) "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms" Quarterly Journal of Economics, May, 109, pp 309-40 Hubbard, R Glenn. (1995) "Is There a Credit Channel for Monetary Policy?" Review, Federal Reserve Bank of St. Louis Meltzer, Allan H. (1995) "Monetary, Credit and (Other) Transmission Processes: A Monetarist Perspective" Journal of Economic Perspectives, Vol. 9, No. 4, pp 49-72 Mishkin, Frederic S. (1995) "Symposium on the Monetary Transmission Mechanism" Journal of Economic Perspectives, Vol. 9, No. 4, pp 3-10 Modiglani, Franco. (1971) "Monetary Policy and Consumption" Consumer Spending and Monetary Policy: The linkages. Boston: Federal Reserve Bank of Boston, pp 9-84 Morsink, James., Bayoumi, Tamim. (2001) "A Peek Inside the Black Box: The Monetary Transmission Mechanism in Japan" IMF Staff Papers, Vol. 48., No. 1, pp 22-57 Mundell, Robert. (1962) "Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates" Canadian Journal of Economics and Political Science, 29. pp 475-87 Pierce, D G., Tysome, P J. (1985) "Monetary Economics: Theories, Evidence and Policy" Butterworth and Co Ltd, 2" Edition Romer, Christine D., Romer, David H. (1990) "New Evidence on the Monetary Transmission Mechanism" Brookings Papers on Economic Activity, 1, pp 149-213 Sims, C A. (1992) "Interpreting the Macro-economic Time Series Facts: The effects of monetary policy" European Economic Review, 36, pp. 975-1011 Taylor, John B. (1995) "The Monetary Transmission Mechanism: An Empirical Framework" Journal of Economic Perspectives, Vol. 9, No. 4, pp 11-2