Inside New Zealand's little black box

Abstract

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.