The Monetary Policy and its Impact on the New Zealand Economy


Since the end of World War II the world has been encountering challenges that come with recession. New Zealand has been faced with the challenges of economic recession like the other countries of the world. In order to overcome the economic recession, the government of New Zealand has made great efforts to stimulate the sluggish economy (Barro, 1996).

The government has decided to implement fiscal policy and monetary policy. The reserve bank has the monetary authority for operational independence to achieve the goal of price stability. The government conducts fiscal policy and reports any discretionary changes in advance to the bank to assess macroeconomic and monetary settings. Monetary and fiscal policy needs to be coordinated in such a way that fiscal policy is an environment with which monetary policy operates.

The impact of fiscal and monetary policy on the economy

Fiscal policy can be designed by the government to enhance economic growth. The New Zealand government is aimed at achieving the objective of economic growth through regulation, designing the institutions and changing the structure of government spending and taxation. Fiscal policy impacts on economic growth in three different ways including, fiscal sustainability, fiscal structure and fiscal stabilization.

The government has always aimed at attaining fiscal sustainability through taking into account the significance of sound public finances along with steady as well as predictable taxation rates, in addition to expenses programs for economic development. The Fiscal composition judge how the composition of disbursement and taxation plus size of government effect on growth. According to Kesley (1999), fiscal stabilization will help the government in contributing to macroeconomic stability and growth.

Fiscal policy manipulates the steadiness of taxation charge as well as government programmes, in addition to cost of capital. The continuation of supporting public finances directs toward a more proficient public funding system that permit the government in upholding a secure taxation rates. This will enable the government to raise debt at reasonable cost since fiscal policy targets the reduction of inflation.

The possibility of the policies achieving the desired economic objectives

Monetary policy will achieve price stability since it is aimed at maintaining low inflation which is will enhance the competitiveness f the New Zealand economy. Price stability will be achieved by reducing the increase in prices and increasing incomes to consumers. The policies are aimed at reducing interest rates to support the economy.

This will encourage investors to invest more hence improving the economy. Policy measures have been introduced by the government that will reduce borrowing costs to businesses and consumers. Stiglitz (1993) argues that inflation has been reduced over the last four years and the consumer price index is averaging at 3.1%. There are chances of the government getting more benefits due to business cycle stabilization. There is a flexible approach to inflation targeting which explicitly enhances the stabilization of the output gap.

The impact of Fiscal policy and monetary policy on the five macro economic goals of the government of New Zealand

The monetary policy is expected to work harder to achieve the objectives of improving economic growth by curbing inflation. The monetary policy resolves to work in line with the government guidelines to successfully trim down inflation within the country. The monetary policy is expected to improve the economy’s productive capacity by reducing the growth in consumer spending.

Monetary policy will reduce the growth in government expenditure which will bring down the increasing inflation. It will also enhance reductions in taxes that will act as an incentive for improved productivity growth which is a key condition required for non inflationary growth. Monetary policy will also enhance the competitive environment in order to maintain a down ward pressure on prices.

This will as well promote augmented immigration which tends to be of advantage to the state in the course of economic and cultural benefits. The government is aimed at improving New Zealand savings culture and monetary policy will help in reducing the spending by consumers through reduces interest and exchange rates. Monetary policy will improve the growth of productivity in the ne Zealand economy which improves the economies capacity for non inflationary growth (Bollard, 2005).

AD/AS diagram
The current position of the economy and the possible changes to the economy if the fiscal and monetary policies have the desired effect (AD/AS diagram).

Stevenson (2001) denotes that the Real GDP growth concerning the economy of New Zealand was 4.8%, in December 2004. This was one of one of the strongest growth performances in the OECD. There was solid world growth and high terms of trade due to the strong prices for the exports of New Zealand. The existence of a stronger labor market with the rising house prices and increased wealth has underpinned the increasing consumer confidence. In 2008, there was a strong performance as a trend that has existed in the previous years.

GPD Growth

Svensson (2001) Economic growth slowed down over the second half of 2004 where there was a moderate growth. The existing high exchange rates are affecting the exporter’s revenue and may lead to reduction in the New Zealand economic growth. The institutional change, and the inflation targeting framework of the policies with which has become synonymous, corresponds with the achievement of price stability. The increase in economic growth leads to longer expansions.

Central government gross debt projections present a risk to New Zealand’s country rating Per cent of GDP
Central government gross debt projections present a risk to New Zealand’s country rating Per cent of GDP.

The effectiveness of monetary policy during the last five years in the analysis

The flexibility of the policies ensures that price stability is achieved for a short run economic growth. Monetary policy has the targets of influencing output and exchange rates in the short run. This is attained owing to the sluggishness in prices expectations owed toward a diversity of frictions as well as transaction costs within the economy.

These could comprise of informational costs that occur as a result of the uncertainty concerning the economy plus the cost of incessantly altering one’s prices. Changes in the real interest rate usually affect the inter-temporal price of borrowing and spending (Temple, 2000, p. 401). The adjustments in real exchange rate have an effect on the relative cost of purchasing output from a different nation.

The insulate as a result of a real interest rate as well as exchange rate direct to total demand which takes a year by means of a advance lag in the direction of domestic inflation. A solitary aspect of an elastic move toward the inflation target is matched up with the policy perspective on the way to the output gap-to-inflation lag. Furthermore, the policy could be created for response toward matching the nature of the macroeconomic interruptions. Figure for gives an illustration of a trade off between inflation and output variability.

How the multiplier may affect the growth of GDP due to the impact of the above mentioned policies

According to West (2003) the multiplier may affect the growth of GDP either positively or negatively. The fiscal position may shift from a deficit to a surplus hence strengthening the expenditure control. Revenues tend to remain stable and expenditures as a share of GDP would drop accompanied by declining interest rates.

This improves the GDP and reduces the unemployment rates in the country. The fiscal stimulus is one of the tools used by the government to increase the level of economic activity during a recession.

The money spend by the government may increase the gross domestic product more the amount spend. The reason is that, when the government increases it’s spending, the consumers usually responds to the extra income earned hence they tend o spend more. The increase in consumer spending leads to the expansion of aggregate demand which results to raising the GDP.

The multiplier may lead to less growth in the GDP in the sense that it expands less than expected after the government increases its spending (Barlevy, 2001, p. 43). This indicates that, precaution measures need to be taken by the government in order to effectively spend in order to increase the long term productivity of the country. The reduction in tax rates may not have an immediate feed back to pending increments. Consumers tend to save the money which is increased at their hands by reduced taxes.

Impact of the policies mentioned above on exchange rates and the balance of payments

Fiscal and monetary policies in New Zealand are flexible and affect savings, investment where the demand for real balances are positively related to real income. There is an inverse relationship between investment and the demand for real balances and the rate of interest. Kim et al (2003) describes that, there is a possibility of deterioration of the balance of payments on current account if domestic income or wealth rises or the domestic currency appreciates.

The balance of payments improves when foreign income or wealth rises or the domestic currency depreciates. Wealth can be in terms of physical capital, the stock of real balances and the ownership claims on foreign capital minus claims on domestic capital owned by foreigners. Any increase in wealth stimulates the growth in consumption, imports and the demand for real balances. Government expenditure is usually independent and financed by huge taxes from the state.

The domestic supply of money is protected from fluctuations in the external sector and varies directly with the surpluses of the balance of payments under a fixed exchange rate.

Surviving in a current economic situation

Many countries around the world are already in recession and are not expected to rise in the near future. Recession in a country can be fought through the availability of finances to customers, ensuring that there is low unemployment in a country and giving lower interest rates. Consumer spending is expected to collapse and this will lead to a severe recession in the country.

In order to prevent this New Zealand interest rates are expected to fall by at least 0.5% to 4% while in go down to a maximum of 2%. However, with the benefit of lower interest rates and increased public spending would be a solution to the New Zealand economy as a whole to avoid recession.

How state should handle employees during an economic down turn

For instance poor economic conditions were announced in the New York Times that this would lead to dismissing many employees of the Newspaper Guild. Many citizens losing their jobs hence experiencing difficult times without or with little compensation followed this lay off. Lay offs in a country is seen as leading to economic down turn in the country.

The purchasing power for the citizens is highly affected. A central bank can take the action of getting ideas of dealing with the finances of the organization from employees. This decision has high possibilities of improving the performance of the business and controlling prevailing economic conditions. Employees are required to be alerted on the future plans for the organization.

Even the times of layoffs due to effects of down turn a state has the duty of managing the employees and helping them to succeed. A government is required to keep meetings short as well as taking the responsibility of what is happening in the business. Layoffs in an organization or in a country combined with down turn for the employees may make them desperate and they may come asking assistance from the government. However, many firms are forced to layoff employees in order to deal wit economic down turn.

Debt management

The government together with the manager is required to help employees of an organization in managing their debts. This helps the employees to ease the pressure created by falling earnings. It is important for the manager to take precautions and be good in financial management at the time economic down turn.

There is need for the manager to create security concern for the employees of a company. This is a way of motivating employees during an economic down turn without adding to the outcome. Government and organizations should help employees to cope with the economic down turn effects through increasing their wellness. This can also be managed through good communication skills between the manager and employees in the organization.

The world is faced with an economic down turn that has brought many problems to the publics. The citizens are faced with more responsibilities when it comes to the distribution of the available money in meeting their needs. The main cause that is believed to have caused economic down turn in the whole world is the increase in oil prices.


In conclusion, it is evident that there may be increases in inflation if the government invests more on the economy. New Zealand has significantly improved its economic operation within the terms of high standard real GDP growth along with the declines in wider macroeconomic instability.

It is evident that the use of fiscal policy by the government can achieve long term growth through sustainability. The government can structure fiscal policy in the best way to contribute to macroeconomic stability. The government requires sustainable public finances to ensure that the cost of financing expenditure is minimized. The government will be able to develop various endogenous growth models using fiscal policy with the aim of influencing long run growth.

The New Zealand economic growth reaffirms the small as well as a stable inflation setting which appear to be conducive to improved growth results. Consumers are able to save and make investment economic decisions due to the presence of price stability in the developing economy.


Andres, J. & Hernando, I. (1997). Inflation and economic growth: some evidence for the OECD countrie. Monetary Policy and the Inflation Process – BIS Conference Papers, No 4, p. 364-383.

Barlevy, G. (2005). The cost of business cycles, and the benefits of stabilization. Economic Perspectives. Federal Reserve Board of Chicago, 1Q, p. 32-49.

Barro, R (1996). Inflation and Growth. Federal Reserve of St Louis Review. NBER Working Papers, No 5326.

Bollard, A. (2005). New Zealand’s potential growth rate. Address to the Canterbury Employer’s Chamber of Commerce, Christchurch.

Kim, B. K. & McLellen N. (2003). The impact of monetary policy on New Zealand’ business cycles and inflation variability. New Zealand Treasury Working Paper 03/09.

Stewart, J. & Moodie, B. (2003) Economic Concepts and Applications. The Contemporary New Zealand, Edition 3. Pearson Education: New Zealand.

Kelsey, J. (1999). Reclaiming the Future. New Zealand and the Global Economy, Wellington.: Bridget Williams Books.

Mourougane, A., & Wise, M. (2005). Product market competition and economic performance in New Zealand. OECD Working Paper No 437.

Stiglitz, J (1993). Endogenous Growth and Cycles NBER Working Paper, No 4286.

Svensson, L. (2001). Independent Review of the Operation of Monetary Policy in New Zealand: Report to the Minister of Finance.

Temple, J. (2000). Inflation and Growth. Stories Short and Tall. Journal of Economic Surveys, 14(4), p. 395-426.

West, K. (2003). Monetary policy and the volatility of real exchange rates in New Zealand. Reserve Bank of New Zealand Discussion Paper 03/10.

Find out the price of your paper