Abstract
This Selected Issues paper examines the external linkages of the New Zealand economy. Empirical results from vector autoregressive models suggest that economic activity in Australia tends to have more of a significant direct impact on New Zealand than does activity in the United States. Fluctuations in the U.S. GDP, however, appear to be transmitted to New Zealand indirectly through their effects on the Australian economy. Financial linkages also have been important components in transmitting shocks from Australia and the United States to the New Zealand economy.
I. External Linkages of New Zealand’s Economy 1
1. New Zealand is a small open economy, whose dependence on trade and its close linkages to global financial markets tend to ensure that output performance and its volatility are closely linked to developments in the rest of the world. This significant dependence leaves New Zealand’s growth prospects vulnerable to economic performance in key markets—particularly Australia and the United States. Trade flows are certainly the most observable transmission mechanism; however, financial markets are also an important channel through which the New Zealand business cycle is influenced by the Australian and the U.S. economies.
2. Over the last two decades, there has been a high degree of synchronization between fluctuations in New Zealand’s economy and business cycles in Australia and in the United States. In particular, during the 1980s and the first half of the 1990s, output in New Zealand and Australia was closely correlated with the U.S. business cycle. From 1995 onward, however, the behavior of real GDP in New Zealand has differed from that in its two largest trading partners, largely reflecting the influence of New Zealand specific shocks. The Asian crisis and domestic droughts significantly slowed New Zealand’s economic activity in 1998; subsequently, and despite the sluggish performance of the U.S. economy, activity rebounded on the strength of improving terms of trade and strong domestic demand.
3. Empirical results from vector autoregressive (VAR) models suggest that economic activity in Australia tends to have more of a significant direct impact on New Zealand than does activity in the United States. Fluctuations in U.S. GDP, however, appear to be transmitted to New Zealand indirectly through their effects on the Australian economy. Financial linkages also have been important components in transmitting shocks from Australia and the United States to the New Zealand economy. The analysis indicates that while Australian interest rate volatility has played an important role in explaining New Zealand real GDP fluctuations, United States equity prices has also had important effects on New Zealand economic activity.
A. Regularities in the New Zealand Business Cycle
4. Compared to Australia and the United States, New Zealand has displayed lower growth rates and higher output volatility (Table 1). Although the output differential has been reduced in the post-reform period (1992-2002), New Zealand GDP growth still lags behind that of Australia. Similarly, the volatility of output growth in New Zealand has been lower during the post-reform period, but is still significantly higher than that observed in both Australia and the United States.
New Zealand: Properties of GDP Growth Rates
New Zealand: Properties of GDP Growth Rates
| Country | Means | Standard Deviations | Autocorrelations | ||||||
|---|---|---|---|---|---|---|---|---|---|
| 1965-02 | 1965-83 | 1992-02 | 1965-02 | 1965-83 | 1992-02 | 1965-02 | 1965-83 | 1992-02 | |
| Australia | 3.7 | 3.7 | 3.7 | 1.9 | 2.1 | 0.9 | 0.21 | 0.24 | 0.06 |
| New Zealand | 2.5 | 2.3 | 3.1 | 2.5 | 2.7 | 1.8 | 0.30 | 0.40 | 0.13 |
| United States | 3.2 | 3.1 | 3.1 | 2.1 | 2.6 | 1.2 | 0.18 | 0.12 | 0.24 |
New Zealand: Properties of GDP Growth Rates
| Country | Means | Standard Deviations | Autocorrelations | ||||||
|---|---|---|---|---|---|---|---|---|---|
| 1965-02 | 1965-83 | 1992-02 | 1965-02 | 1965-83 | 1992-02 | 1965-02 | 1965-83 | 1992-02 | |
| Australia | 3.7 | 3.7 | 3.7 | 1.9 | 2.1 | 0.9 | 0.21 | 0.24 | 0.06 |
| New Zealand | 2.5 | 2.3 | 3.1 | 2.5 | 2.7 | 1.8 | 0.30 | 0.40 | 0.13 |
| United States | 3.2 | 3.1 | 3.1 | 2.1 | 2.6 | 1.2 | 0.18 | 0.12 | 0.24 |
5. All the major expenditure components in New Zealand’s GDP accounts are less volatile in the post-reform period, but volatility remains higher than in Australia and the United States. The major components with the largest volatility in New Zealand GDP have been investment, imports, and government expenditures. It is worth noting that for government expenditures the volatility is around twice that of the same component in Australia and the United States. One possible explanation is the considerable fluctuation in the national defense expenditure in New Zealand.2
6. Although the magnitude of output fluctuations has changed over time, the relationship among real variables within the New Zealand economy has been relatively stable. In New Zealand, similar to the business cycle regularities reported for some other industrial countries by Kydland and Prescott (1990) and Backus and Kehoe (1992), consumption, investment, and imports are strongly procyclical and contemporaneous with output (Table 2 and Tables A.1 and A.2). Government expenditure, however, since the beginning of the 1990s has become substantially less cyclical.
Properties of National Expenditure Components
Properties of National Expenditure Components
| Properties by Country | 1965-1983 | 1992-2002 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| C | G | I | X | M | C | G | I | X | M | |
| A. Standard Deviations | ||||||||||
| Australia | 1.1 | 2.7 | 4.3 | 5.5 | 7.3 | 1.0 | 1.3 | 5.6 | 3.1 | 4.5 |
| New Zealand | 3.6 | 5.3 | 11.9 | 4.3 | 9.8 | 2.1 | 2.1 | 8.6 | 1.9 | 3.9 |
| United States | 2.0 | 3.1 | 6.1 | 5.9 | 7.5 | 1.2 | 2.0 | 5.7 | 5.3 | 5.5 |
| B. Standard Deviations Relative to GDP | ||||||||||
| Australia | 0.6 | 1.4 | 2.3 | 2.9 | 3.9 | 0.8 | 1.0 | 4.6 | 2.6 | 3.7 |
| New Zealand | 1.1 | 1.6 | 3.6 | 1.3 | 2.9 | 0.9 | 1.0 | 3.9 | 0.9 | 1.8 |
| United States | 0.8 | 1.2 | 2.4 | 2.4 | 3.0 | 1.0 | 1.8 | 5.0 | 4.7 | 4.9 |
| C. Cross-Correlations with GDP | ||||||||||
| Australia | 0.45 | 0.07 | 0.64 | 0.62 | 0.32 | 0.73 | 0.45 | 0.91 | -0.14 | 0.74 |
| New Zealand | 0.75 | 0.58 | 0.83 | -0.31 | 0.60 | 0.88 | 0.02 | 0.97 | 0.45 | 0.80 |
| United States | 0.88 | 0.27 | 0.95 | 0.31 | 0.76 | 0.81 | -0.37 | 0.96 | 0.57 | 0.97 |
Properties of National Expenditure Components
| Properties by Country | 1965-1983 | 1992-2002 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| C | G | I | X | M | C | G | I | X | M | |
| A. Standard Deviations | ||||||||||
| Australia | 1.1 | 2.7 | 4.3 | 5.5 | 7.3 | 1.0 | 1.3 | 5.6 | 3.1 | 4.5 |
| New Zealand | 3.6 | 5.3 | 11.9 | 4.3 | 9.8 | 2.1 | 2.1 | 8.6 | 1.9 | 3.9 |
| United States | 2.0 | 3.1 | 6.1 | 5.9 | 7.5 | 1.2 | 2.0 | 5.7 | 5.3 | 5.5 |
| B. Standard Deviations Relative to GDP | ||||||||||
| Australia | 0.6 | 1.4 | 2.3 | 2.9 | 3.9 | 0.8 | 1.0 | 4.6 | 2.6 | 3.7 |
| New Zealand | 1.1 | 1.6 | 3.6 | 1.3 | 2.9 | 0.9 | 1.0 | 3.9 | 0.9 | 1.8 |
| United States | 0.8 | 1.2 | 2.4 | 2.4 | 3.0 | 1.0 | 1.8 | 5.0 | 4.7 | 4.9 |
| C. Cross-Correlations with GDP | ||||||||||
| Australia | 0.45 | 0.07 | 0.64 | 0.62 | 0.32 | 0.73 | 0.45 | 0.91 | -0.14 | 0.74 |
| New Zealand | 0.75 | 0.58 | 0.83 | -0.31 | 0.60 | 0.88 | 0.02 | 0.97 | 0.45 | 0.80 |
| United States | 0.88 | 0.27 | 0.95 | 0.31 | 0.76 | 0.81 | -0.37 | 0.96 | 0.57 | 0.97 |
B. Relationship Between New Zealand, Australian, and U.S. Business Cycles
7. The correlation of business cycles in New Zealand, Australia, and the United States is assessed using the methodology proposed by Kydland and Prescott (1990). GDP for the three countries are detrended using the Hodrick-Prescott filter. Cross correlations between these detrended series, which serve as proxies for the cyclical component of GDP, were then calculated.3 The analysis suggests that the New Zealand business cycle closely follows both the Australian and the U.S. cycles during the 1980s and part of the 1990s.4 After the U.S. recession at the beginning of the 1980s, the three economies entered into an expansion period that lasted until 1989. Correlations of cyclical GDP continued to be strong through the following recession in the early 1990s and the subsequent recovery and expansion up until around 1995. The correlation turned negative when the U.S. and the Australian economies continued growing, while New Zealand experienced an economic slowdown and brief contraction in 1998 owing to the effects of two consecutive droughts and the Asian crisis. In contrast, New Zealand GDP growth has been relatively strong in comparison to the United States since 1999, as generally favorable commodity prices and the strength of domestic demand have kept New Zealand economic activity at high levels despite the U.S. slump (Tables A.3 and A.4).
8. VAR models have been commonly used to systematically assess the major influences on fluctuations in the New Zealand business cycle. In one of the most recent and comprehensive assessments using a VAR model, Buckle et al (2002) conclude that international variables, particularly world output, world equity prices, and world interest rates, have been the key sources of volatility in New Zealand’s real GDP.5 In addition, their analysis specifically accounts for domestic climatic conditions, given the importance of agriculture in New Zealand’s economy, finding significant effects, especially, during the 1998 recession. Finally, and contrary to the conventional wisdom, this analysis suggests that shocks from the exchange rate have been relatively unimportant.
9. To complement the analysis in Buckle et al (2002), VAR models were estimated to identify the geographical sources of the external shocks that have influenced the New Zealand business cycle during the 1990s. The first model gauges direct economic linkages between New Zealand and Australia and the United States. The VAR model is estimated over the period 1991:Q1 to 2002:Q3, and captures the historical time series relationships between U.S., Australian and New Zealand GDP growth rates6 The econometric structure for the VAR model imposes the restriction that both Australian and New Zealand GDP growth do not influence U.S. GDP growth.
10. To evaluate the impact on the New Zealand economy of international economic fluctuations, the model is used to estimate impulse-response functions for Australian and U.S. GDP growth shocks. The results suggest that only the shock to Australian GDP growth has a significant direct impact on New Zealand economic activity (Figure 1). In particular, the peak impact from an Australian shock to New Zealand GDP growth occurs with a lag of two quarters and lasts one year; while there is no statistically significant effect in the case of a U.S. GDP shock.
New Zealand: Impulse-Response Functions, GDP Shocks
Citation: IMF Staff Country Reports 2003, 122; 10.5089/9781451830248.002.A001
New Zealand: Impulse-Response Functions, GDP Shocks
Citation: IMF Staff Country Reports 2003, 122; 10.5089/9781451830248.002.A001
New Zealand: Impulse-Response Functions, GDP Shocks
Citation: IMF Staff Country Reports 2003, 122; 10.5089/9781451830248.002.A001
11. A variance decomposition analysis suggests that Australian GDP growth explains a large share of New Zealand output volatility (Table 3). After two years, an Australian shock explains almost 25 percent of the fluctuations in New Zealand’s output. By contrast, a U.S. GDP growth shock has relatively little direct impact on New Zealand output. Indirect effects are likely to be significant, however, since Australia’s GDP tends to be heavily influenced by developments in the U.S. economy (Figure 1)7
New Zealand: Variance Decomposition of GDP
New Zealand: Variance Decomposition of GDP
| Forecast | Std. Error | Proportion of Forecast Error (Perc | ||
|---|---|---|---|---|
| Horizon | U.S. GDP | A US GDP | NZ GDP | |
| 1 | 0.01 | 2.23 | 2.07 | 95.70 |
| 2 | 0.02 | 4.86 | 2.92 | 92.22 |
| 3 | 0.02 | 8.14 | 6.61 | 85.25 |
| 4 | 0.02 | 10.38 | 11.88 | 77.74 |
| 5 | 0.02 | 11.49 | 16.91 | 71.60 |
| 6 | 0.02 | 11.98 | 20.67 | 67.34 |
| 7 | 0.02 | 12.27 | 23.07 | 64.66 |
| 8 | 0.03 | 12.53 | 24.43 | 63.04 |
New Zealand: Variance Decomposition of GDP
| Forecast | Std. Error | Proportion of Forecast Error (Perc | ||
|---|---|---|---|---|
| Horizon | U.S. GDP | A US GDP | NZ GDP | |
| 1 | 0.01 | 2.23 | 2.07 | 95.70 |
| 2 | 0.02 | 4.86 | 2.92 | 92.22 |
| 3 | 0.02 | 8.14 | 6.61 | 85.25 |
| 4 | 0.02 | 10.38 | 11.88 | 77.74 |
| 5 | 0.02 | 11.49 | 16.91 | 71.60 |
| 6 | 0.02 | 11.98 | 20.67 | 67.34 |
| 7 | 0.02 | 12.27 | 23.07 | 64.66 |
| 8 | 0.03 | 12.53 | 24.43 | 63.04 |
12. The second set of VAR models introduces financial variables. Separate VAR models are estimated to gauge the influence of the Australian and the U.S. economies on New Zealand. The econometric structure of both models is identical, so results are directly comparable. These models use seven variables (in the same recursive order in the VARs): Australian (or U.S.) GDP, a commodity price index, Australian (or U.S.) short-term interest rate, Australian (or U.S.) equity price index, New Zealand equity price index, New Zealand GDP, and the New Zealand short-term interest rate.8 The sample period runs from 1994:Q2 to 2002:Q3.
13. The results confirm the importance of the Australian business cycle in explaining the New Zealand business cycle. In particular, real domestic activity in Australia plays the most important role in explaining New Zealand GDP fluctuations (over 20 percent in the first year, Table 4). On the other hand, in line with the other results reported here, changes in U.S. GDP have relatively little direct impact on New Zealand output during the forecast horizon (Table 5).
New Zealand and Australia: Variance Decomposition of New Zealand GDP
New Zealand and Australia: Variance Decomposition of New Zealand GDP
| Proportion on of Forecast Error (Percent) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Forecast | Std. Error | Commodity | Australia | New Zealand | ||||
| Horizon | Price | Equity Prices | GDP | Int. Rate | Equity Prices | GDP | Int. Rate | |
| 1 | 0,011 | 4.64 | 0.95 | 8.49 | 7.01 | 0.83 | 78.08 | 0.00 |
| 2 | 0.014 | 3.06 | 4.40 | 16.01 | 5.49 | 1,52 | 68.43 | 1.09 |
| 3 | 0.016 | 2.77 | 5.70 | 19.55 | 4.29 | 1,75 | 63.87 | 2.07 |
| 4 | 0.018 | 2.86 | 5.86 | 23.45 | 7.16 | 1.38 | 56.32 | 2.97 |
| 5 | 0.021 | 4.05 | 6.92 | 28.94 | 11.01 | 1.20 | 44.62 | 3.28 |
| 6 | 0.022 | 4.85 | 7.60 | 29.81 | 13.07 | 1.23 | 39.65 | 3.80 |
| 7 | 0.023 | 4.73 | 7.77 | 29.13 | 14.66 | 1.83 | 37.87 | 4.01 |
| 8 | 0.023 | 4.66 | 7.86 | 28.66 | 15.22 | 2.30 | 37.29 | 4.01 |
New Zealand and Australia: Variance Decomposition of New Zealand GDP
| Proportion on of Forecast Error (Percent) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Forecast | Std. Error | Commodity | Australia | New Zealand | ||||
| Horizon | Price | Equity Prices | GDP | Int. Rate | Equity Prices | GDP | Int. Rate | |
| 1 | 0,011 | 4.64 | 0.95 | 8.49 | 7.01 | 0.83 | 78.08 | 0.00 |
| 2 | 0.014 | 3.06 | 4.40 | 16.01 | 5.49 | 1,52 | 68.43 | 1.09 |
| 3 | 0.016 | 2.77 | 5.70 | 19.55 | 4.29 | 1,75 | 63.87 | 2.07 |
| 4 | 0.018 | 2.86 | 5.86 | 23.45 | 7.16 | 1.38 | 56.32 | 2.97 |
| 5 | 0.021 | 4.05 | 6.92 | 28.94 | 11.01 | 1.20 | 44.62 | 3.28 |
| 6 | 0.022 | 4.85 | 7.60 | 29.81 | 13.07 | 1.23 | 39.65 | 3.80 |
| 7 | 0.023 | 4.73 | 7.77 | 29.13 | 14.66 | 1.83 | 37.87 | 4.01 |
| 8 | 0.023 | 4.66 | 7.86 | 28.66 | 15.22 | 2.30 | 37.29 | 4.01 |
New Zealand and the United States: Variance Decomposition of New Zealand GDP
New Zealand and the United States: Variance Decomposition of New Zealand GDP
| Proportion of Forecast Error {Percent) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Forecast | Std Error | Commodity | United States | New Zealand | ||||
| Horizon | Price | Equity Prices | GDP | Int. Rate | Equity Prices | GDP | Ini. Rate | |
| 1 | 0.011 | 0.21 | 12.63 | 0.03 | 0.11 | 5.85 | 81.16 | 0.00 |
| 2 | 0.013 | 0.44 | 13.59 | 3.70 | 3.55 | 4.10 | 73 77 | 0.84 |
| 3 | 0.016 | 5.86 | 21.28 | 3.16 | 3.91 | 3.01 | 59.46 | 3.32 |
| 4 | 0.019 | 7.57 | 27.71 | 2.31 | 3.45 | 4.34 | 45.42 | 9.21 |
| 5 | 0.021 | 8.15 | 33.32 | 1.96 | 3.04 | 4.32 | 36.88 | 12.34 |
| 6 | 0.023 | 7.97 | 39.73 | 1.96 | 2.75 | 3.78 | 30.92 | 12.89 |
| 7 | 0.025 | 7.23 | 43.91 | 2.23 | 2.79 | 3.34 | 28.22 | 12.28 |
| 8 | 0.026 | 6.57 | 45.98 | 2.67 | 3.15 | 3.21 | 27.18 | 11.24 |
New Zealand and the United States: Variance Decomposition of New Zealand GDP
| Proportion of Forecast Error {Percent) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Forecast | Std Error | Commodity | United States | New Zealand | ||||
| Horizon | Price | Equity Prices | GDP | Int. Rate | Equity Prices | GDP | Ini. Rate | |
| 1 | 0.011 | 0.21 | 12.63 | 0.03 | 0.11 | 5.85 | 81.16 | 0.00 |
| 2 | 0.013 | 0.44 | 13.59 | 3.70 | 3.55 | 4.10 | 73 77 | 0.84 |
| 3 | 0.016 | 5.86 | 21.28 | 3.16 | 3.91 | 3.01 | 59.46 | 3.32 |
| 4 | 0.019 | 7.57 | 27.71 | 2.31 | 3.45 | 4.34 | 45.42 | 9.21 |
| 5 | 0.021 | 8.15 | 33.32 | 1.96 | 3.04 | 4.32 | 36.88 | 12.34 |
| 6 | 0.023 | 7.97 | 39.73 | 1.96 | 2.75 | 3.78 | 30.92 | 12.89 |
| 7 | 0.025 | 7.23 | 43.91 | 2.23 | 2.79 | 3.34 | 28.22 | 12.28 |
| 8 | 0.026 | 6.57 | 45.98 | 2.67 | 3.15 | 3.21 | 27.18 | 11.24 |
14. Both VAR models corroborate the importance of international financial linkages. In particular, together with Australian output, an Australian interest rate shock is one of the major sources of New Zealand real GDP fluctuations. In the case of the United States, real equity prices have played an important role in explaining New Zealand business cycle since the late 1990s. In general, New Zealand equity prices are more responsive to U.S. equity price shocks than to the Australian ones.
New Zealand: Impulse-Response Functions, Australian Shocks
Citation: IMF Staff Country Reports 2003, 122; 10.5089/9781451830248.002.A001
New Zealand: Impulse-Response Functions, Australian Shocks
Citation: IMF Staff Country Reports 2003, 122; 10.5089/9781451830248.002.A001
New Zealand: Impulse-Response Functions, Australian Shocks
Citation: IMF Staff Country Reports 2003, 122; 10.5089/9781451830248.002.A001
New Zealand: Impulse-Response Functions, U.S. Shocks
Citation: IMF Staff Country Reports 2003, 122; 10.5089/9781451830248.002.A001
New Zealand: Impulse-Response Functions, U.S. Shocks
Citation: IMF Staff Country Reports 2003, 122; 10.5089/9781451830248.002.A001
New Zealand: Impulse-Response Functions, U.S. Shocks
Citation: IMF Staff Country Reports 2003, 122; 10.5089/9781451830248.002.A001
ANNEX I
New Zealand: Properties of National Expenditure Components, 1965-1983
New Zealand: Properties of National Expenditure Components, 1965-1983
| Cross-Correlation of GDP with | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| t-4 | t-3 | t-2 | t-1 | t | t+1 | t+2 | t+3 | t+4 | |
| Australia | |||||||||
| GDP | -0.18 | -0.10 | 0.05 | 0.46 | 1.00 | 0.46 | 0.05 | -0.10 | -0.18 |
| C | -0.01 | 0.06 | -0.11 | -0.02 | 0.45 | 0.36 | 0.32 | 0.28 | 0.22 |
| G | 0.27 | 0.27 | 0.02 | 0.19 | 0.07 | -0.27 | -0.11 | 0.00 | 0.19 |
| I | 0.13 | 0.10 | -0.15 | -0.04 | 0.64 | 0.27 | -0.03 | -0.22 | -0.44 |
| X | -0.21 | -0.03 | 0.32 | 0.40 | 0.62 | 0.26 | 0.09 | 0.06 | -0.19 |
| M | 0.04 | 0.07 | -0,12 | -0.33 | 0.32 | 0,11 | -0,24 | 0.05 | 0.00 |
| New Zealand | |||||||||
| GDP | -0.49 | -0.29 | 0.01 | 0.53 | 1.00 | 0.53 | 0.01 | -0.29 | -0.49 |
| C | -0.17 | 0.21 | 0.53 | 0.75 | 0.75 | 0.40 | 0.03 | -0.19 | -0.31 |
| G | -0.44 | -0.29 | -0.16 | 0.18 | 0.58 | 0.70 | 0.69 | 0.52 | 0.16 |
| I | -0.12 | 0.28 | 0.56 | 0.82 | 0.83 | 0.46 | -0,11 | -0.46 | -0.59 |
| X | 0.68 | 0.45 | 0.22 | -0.07 | -0.31 | -0.37 | -0.23 | 0.04 | 0.05 |
| M | -0.06 | 0.20 | 0.42 | 0.63 | 0.60 | 0.21 | -0.30 | -0.30 | -0,20 |
| United States | |||||||||
| GDP | -0.38 | -0.35 | -0.05 | 0.51 | 1.00 | 0.51 | -0.05 | -0.35 | -0.38 |
| C | -0.31 | -0.24 | 0.09 | 0.67 | 0.88 | 0.23 | -0.30 | -0.36 | -0.14 |
| G | 0.02 | -0.06 | 0.04 | 0.14 | 0.27 | 0.37 | 0.32 | 0.19 | 0.04 |
| I | -0.35 | -0.47 | -0.19 | 0.45 | 0.95 | 0.45 | -0.19 | -0.40 | -0.25 |
| X | 0.10 | -0.14 | -0.54 | -0.35 | 0.31 | 0.49 | 0.14 | -0.27 | -0.49 |
| M | -0.38 | -0.33 | 0.04 | 0.48 | 0.76 | 0.24 | -0.26 | -0.25 | 0.01 |
New Zealand: Properties of National Expenditure Components, 1965-1983
| Cross-Correlation of GDP with | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| t-4 | t-3 | t-2 | t-1 | t | t+1 | t+2 | t+3 | t+4 | |
| Australia | |||||||||
| GDP | -0.18 | -0.10 | 0.05 | 0.46 | 1.00 | 0.46 | 0.05 | -0.10 | -0.18 |
| C | -0.01 | 0.06 | -0.11 | -0.02 | 0.45 | 0.36 | 0.32 | 0.28 | 0.22 |
| G | 0.27 | 0.27 | 0.02 | 0.19 | 0.07 | -0.27 | -0.11 | 0.00 | 0.19 |
| I | 0.13 | 0.10 | -0.15 | -0.04 | 0.64 | 0.27 | -0.03 | -0.22 | -0.44 |
| X | -0.21 | -0.03 | 0.32 | 0.40 | 0.62 | 0.26 | 0.09 | 0.06 | -0.19 |
| M | 0.04 | 0.07 | -0,12 | -0.33 | 0.32 | 0,11 | -0,24 | 0.05 | 0.00 |
| New Zealand | |||||||||
| GDP | -0.49 | -0.29 | 0.01 | 0.53 | 1.00 | 0.53 | 0.01 | -0.29 | -0.49 |
| C | -0.17 | 0.21 | 0.53 | 0.75 | 0.75 | 0.40 | 0.03 | -0.19 | -0.31 |
| G | -0.44 | -0.29 | -0.16 | 0.18 | 0.58 | 0.70 | 0.69 | 0.52 | 0.16 |
| I | -0.12 | 0.28 | 0.56 | 0.82 | 0.83 | 0.46 | -0,11 | -0.46 | -0.59 |
| X | 0.68 | 0.45 | 0.22 | -0.07 | -0.31 | -0.37 | -0.23 | 0.04 | 0.05 |
| M | -0.06 | 0.20 | 0.42 | 0.63 | 0.60 | 0.21 | -0.30 | -0.30 | -0,20 |
| United States | |||||||||
| GDP | -0.38 | -0.35 | -0.05 | 0.51 | 1.00 | 0.51 | -0.05 | -0.35 | -0.38 |
| C | -0.31 | -0.24 | 0.09 | 0.67 | 0.88 | 0.23 | -0.30 | -0.36 | -0.14 |
| G | 0.02 | -0.06 | 0.04 | 0.14 | 0.27 | 0.37 | 0.32 | 0.19 | 0.04 |
| I | -0.35 | -0.47 | -0.19 | 0.45 | 0.95 | 0.45 | -0.19 | -0.40 | -0.25 |
| X | 0.10 | -0.14 | -0.54 | -0.35 | 0.31 | 0.49 | 0.14 | -0.27 | -0.49 |
| M | -0.38 | -0.33 | 0.04 | 0.48 | 0.76 | 0.24 | -0.26 | -0.25 | 0.01 |
New Zealand: Properties of National Expenditure Components, 1992-2002
New Zealand: Properties of National Expenditure Components, 1992-2002
| Cross-Correlation of GDP with | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| t-4 | t-3 | t-2 | t-1 | t | t+1 | t+2 | t+3 | t+4 | |
| Australia | |||||||||
| GDP | -0.08 | 0.06 | 0.25 | 0.64 | 1.00 | 0.64 | 0.25 | 0,06 | -0.08 |
| C | -0.21 | -0.12 | 0.04 | 0.38 | 0.74 | 0.84 | 0.45 | 0.23 | 0.11 |
| G | -0.24 | -0.20 | -0.11 | -0.06 | 0.45 | 0.89 | 0.59 | 0.27 | 0.13 |
| I | 0.01 | 0.18 | 0.40 | 0.70 | 0.91 | 0.43 | -0.08 | -0,13 | -0.20 |
| X | 0.09 | 0.29 | 0.40 | 0.05 | -0.14 | -0.17 | -0.44 | -0.54 | -0.52 |
| M | 0.08 | 0.25 | 0.41 | 0.51 | 0.74 | 0.44 | -0.23 | -0.41 | -0.35 |
| New Zealand | |||||||||
| GDP | -0.35 | -0.34 | -0,12 | 0.43 | 1.00 | 0.43 | -0.12 | -0.34 | -0.35 |
| C | -0.33 | -0.39 | -0.24 | 0.28 | 0.88 | 0.62 | 0.22 | -0,03 | -0.25 |
| G | 0.06 | -0.05 | -0.20 | -0.26 | 0.02 | 0.36 | 0.69 | 0.42 | 0.04 |
| r | -0.32 | -0.34 | -0.12 | 0.41 | 0.97 | 0.51 | -0.03 | -0.32 | -0.44 |
| X | -0.22 | -0.04 | 0.19 | 0.36 | 0.45 | -0.16 | -0.81 | -0.36 | -0.08 |
| M | -0.26 | -0.29 | -0.10 | 0.39 | 0.80 | 0.39 | -0.05 | -0.26 | -0.44 |
| United States | |||||||||
| GDP | -0.31 | -0.13 | 0.10 | 0.61 | 1.00 | 0.61 | 0,10 | -0.13 | -0.31 |
| C | -0.24 | -0.30 | -0.19 | 0.31 | 0.81 | 0.80 | 0.55 | 0.24 | -0.02 |
| G | -0.27 | -0,45 | -0.50 | " -0.50 | -0.37 | 0.21 | 0.75 | 0.70 | 0.48 |
| I | -0.21 | -0.00 | 0.25 | 0.67 | 0.96 | 0.55 | -0.03 | -0.26 | -0.38 |
| X | -0.05 | 0.29 | 0.32 | 0.36 | 0.57 | 0.07 | -0.57 | -0.56 | -0.51 |
| M | -0.19 | 0.01 | 0.14 | 0.56 | 0.97 | 0.55 | -0,02 | -0,20 | -0.34 |
New Zealand: Properties of National Expenditure Components, 1992-2002
| Cross-Correlation of GDP with | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| t-4 | t-3 | t-2 | t-1 | t | t+1 | t+2 | t+3 | t+4 | |
| Australia | |||||||||
| GDP | -0.08 | 0.06 | 0.25 | 0.64 | 1.00 | 0.64 | 0.25 | 0,06 | -0.08 |
| C | -0.21 | -0.12 | 0.04 | 0.38 | 0.74 | 0.84 | 0.45 | 0.23 | 0.11 |
| G | -0.24 | -0.20 | -0.11 | -0.06 | 0.45 | 0.89 | 0.59 | 0.27 | 0.13 |
| I | 0.01 | 0.18 | 0.40 | 0.70 | 0.91 | 0.43 | -0.08 | -0,13 | -0.20 |
| X | 0.09 | 0.29 | 0.40 | 0.05 | -0.14 | -0.17 | -0.44 | -0.54 | -0.52 |
| M | 0.08 | 0.25 | 0.41 | 0.51 | 0.74 | 0.44 | -0.23 | -0.41 | -0.35 |
| New Zealand | |||||||||
| GDP | -0.35 | -0.34 | -0,12 | 0.43 | 1.00 | 0.43 | -0.12 | -0.34 | -0.35 |
| C | -0.33 | -0.39 | -0.24 | 0.28 | 0.88 | 0.62 | 0.22 | -0,03 | -0.25 |
| G | 0.06 | -0.05 | -0.20 | -0.26 | 0.02 | 0.36 | 0.69 | 0.42 | 0.04 |
| r | -0.32 | -0.34 | -0.12 | 0.41 | 0.97 | 0.51 | -0.03 | -0.32 | -0.44 |
| X | -0.22 | -0.04 | 0.19 | 0.36 | 0.45 | -0.16 | -0.81 | -0.36 | -0.08 |
| M | -0.26 | -0.29 | -0.10 | 0.39 | 0.80 | 0.39 | -0.05 | -0.26 | -0.44 |
| United States | |||||||||
| GDP | -0.31 | -0.13 | 0.10 | 0.61 | 1.00 | 0.61 | 0,10 | -0.13 | -0.31 |
| C | -0.24 | -0.30 | -0.19 | 0.31 | 0.81 | 0.80 | 0.55 | 0.24 | -0.02 |
| G | -0.27 | -0,45 | -0.50 | " -0.50 | -0.37 | 0.21 | 0.75 | 0.70 | 0.48 |
| I | -0.21 | -0.00 | 0.25 | 0.67 | 0.96 | 0.55 | -0.03 | -0.26 | -0.38 |
| X | -0.05 | 0.29 | 0.32 | 0.36 | 0.57 | 0.07 | -0.57 | -0.56 | -0.51 |
| M | -0.19 | 0.01 | 0.14 | 0.56 | 0.97 | 0.55 | -0,02 | -0,20 | -0.34 |
New Zealand: International Correlations, 1965-1983
New Zealand: International Correlations, 1965-1983
| New Zealand Cycle Fluctuations | Cross-Correlation of Australia GDP with | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| t-4 | t-3 | t-2 | t-1 | t | t-1 | t+2 | t+3 | t+4 | |
| GDP | 0.20 | 0.12 | -0.12 | -0.11 | 0.16 | 0.28 | 0.37 | 0.34 | 0.31 |
| Investment | 0.18 | 0.04 | -0.18 | -0.17 | 0.07 | 0.33 | 0.48 | 0.36 | 0.21 |
| Exports | 0.08 | 0.22 | 0.41 | 0.54 | 0.41 | 0.18 | -0.04 | -0.17 | -0.24 |
| Imports | -0.20 | -0.15 | -0.29 | -0.22 | 0.29 | 0.40 | 0.24 | 0.28 | 0.09 |
| Prices | 0.09 | -0.11 | -0.34 | -0.71 | -0.37 | -0.19 | -0.19 | -0.11 | -0.19 |
| Nominal Exchange Rate | 0.60 | -0.19 | -0.84 | -0.41 | -0.02 | 0.29 | 0.26 | ||
| Real Exchange Rate | 0.24 | 0.10 | -0.71 | 0.22 | 0.28 | -0.04 | 0.19 | ||
| Cross-Correlation of U.S. GDP with | |||||||||
| GDP | 0.36 | 0.59 | 0.29 | 0.03 | -0.08 | -0.14 | -0.18 | -0.15 | -0.08 |
| Investment | 0.43 | 0.41 | 0.13 | -0.20 | -0.28 | -0.24 | -0.16 | -0.03 | 0.04 |
| Exports | -0.19 | -0.11 | 0.00 | 0.09 | 0.11 | -0.16 | -0.03 | 0.29 | 0.30 |
| Imports | 0.23 | 0.21 | -0.08 | -0.33 | 0.02 | 0.08 | -0.15 | -0.19 | -0.14 |
| Prices | -0.17 | -0.01 | 0.14 | -0.02 | -0.21 | -0.10 | 0.04 | 0.27 | 0.07 |
| Nominal Exchange Rate | 0.46 | 0.26 | -0.55 | -0.72 | -0.40 | 0.31 | 0.41 | ||
| Real Exchange Rate | 0.08 | 0.21 | -0.34 | -0.26 | 0.22 | 0.08 | 0.40 | ||
New Zealand: International Correlations, 1965-1983
| New Zealand Cycle Fluctuations | Cross-Correlation of Australia GDP with | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| t-4 | t-3 | t-2 | t-1 | t | t-1 | t+2 | t+3 | t+4 | |
| GDP | 0.20 | 0.12 | -0.12 | -0.11 | 0.16 | 0.28 | 0.37 | 0.34 | 0.31 |
| Investment | 0.18 | 0.04 | -0.18 | -0.17 | 0.07 | 0.33 | 0.48 | 0.36 | 0.21 |
| Exports | 0.08 | 0.22 | 0.41 | 0.54 | 0.41 | 0.18 | -0.04 | -0.17 | -0.24 |
| Imports | -0.20 | -0.15 | -0.29 | -0.22 | 0.29 | 0.40 | 0.24 | 0.28 | 0.09 |
| Prices | 0.09 | -0.11 | -0.34 | -0.71 | -0.37 | -0.19 | -0.19 | -0.11 | -0.19 |
| Nominal Exchange Rate | 0.60 | -0.19 | -0.84 | -0.41 | -0.02 | 0.29 | 0.26 | ||
| Real Exchange Rate | 0.24 | 0.10 | -0.71 | 0.22 | 0.28 | -0.04 | 0.19 | ||
| Cross-Correlation of U.S. GDP with | |||||||||
| GDP | 0.36 | 0.59 | 0.29 | 0.03 | -0.08 | -0.14 | -0.18 | -0.15 | -0.08 |
| Investment | 0.43 | 0.41 | 0.13 | -0.20 | -0.28 | -0.24 | -0.16 | -0.03 | 0.04 |
| Exports | -0.19 | -0.11 | 0.00 | 0.09 | 0.11 | -0.16 | -0.03 | 0.29 | 0.30 |
| Imports | 0.23 | 0.21 | -0.08 | -0.33 | 0.02 | 0.08 | -0.15 | -0.19 | -0.14 |
| Prices | -0.17 | -0.01 | 0.14 | -0.02 | -0.21 | -0.10 | 0.04 | 0.27 | 0.07 |
| Nominal Exchange Rate | 0.46 | 0.26 | -0.55 | -0.72 | -0.40 | 0.31 | 0.41 | ||
| Real Exchange Rate | 0.08 | 0.21 | -0.34 | -0.26 | 0.22 | 0.08 | 0.40 | ||
New Zealand: International Correlations, 1992-2002
New Zealand: International Correlations, 1992-2002
| New Zealand Cycle Fluctuations | Cross-Correlation ot Australia GDP with | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| t-4 | t-3 | t-2 | t-1 | t | t-2 | t-1 | t+3 | t+4 | |
| GDP | 0,32 | 0.50 | 0.35 | 0.33 | 0.45 | 0.14 | -0.16 | -0.28 | -0.29 |
| Investment | 0.35 | 0.53 | 0.43 | 0.39 | 0.45 | 0.06 | -0.26 | -0.39 | -0.34 |
| Exports | 0.39 | 0.17 | -0.09 | -0.33 | -0.09 | -0.13 | -0.57 | -0.37 | -0.08 |
| Imports | 0.38 | 0.50 | 0.30 | 0.27 | 0.45 | 0.05 | -0.49 | -0.49 | -0.35 |
| Prices | -0.28 | -0.22 | -0.12 | -0.19 | -0.08 | 0.37 | 0.79 | 0.70 | 0.36 |
| Nominal Exchange Rate | 0.28 | 0.57 | 0.55 | 0.42 | 0.22 | -0.20 | -0.45 | -0.43 | -0.48 |
| Real Exchange Rate | 0.26 | 0.58 | 0.57 | 0.44 | 0.25 | -0.12 | -0.38 | -0.42 | -0.49 |
| Cross-Correlation of U.S. GDP with | |||||||||
| GDP | 0.48 | 0.67 | 0.32 | 0.24 | 0.19 | -0.04 | -0.12 | -0.15 | -0.17 |
| Investment | 0.46 | 0.70 | 0.45 | 0.35 | 0.22 | -0.14 | -0.25 | -0.26 | -0.22 |
| Exports | 0.55 | 0.34 | -0.32 | -0.35 | -0.02 | -0.26 | -0.37 | -0.16 | -0.09 |
| Imports | 0.51 | 0.53 | 0.31 | 0.44 | 0.23 | -0.23 | -0.37 | -0.40 | -0.27 |
| Prices | -0.30 | -0.17 | -0.12 | -0.30 | -0.23 | 0.35 | 0.81 | 0.64 | 0.38 |
| Nominal Exchange Rate | 0.36 | 0.75 | 0.58 | 0.43 | 0.03 | -0.47 | -0.51 | -0.43 | -0.34 |
| Real Exchange Rate | 0.34 | 0.77 | 0.62 | 0.45 | 0.07 | -0.39 | -0.47 | -0.42 | -0,34 |
New Zealand: International Correlations, 1992-2002
| New Zealand Cycle Fluctuations | Cross-Correlation ot Australia GDP with | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| t-4 | t-3 | t-2 | t-1 | t | t-2 | t-1 | t+3 | t+4 | |
| GDP | 0,32 | 0.50 | 0.35 | 0.33 | 0.45 | 0.14 | -0.16 | -0.28 | -0.29 |
| Investment | 0.35 | 0.53 | 0.43 | 0.39 | 0.45 | 0.06 | -0.26 | -0.39 | -0.34 |
| Exports | 0.39 | 0.17 | -0.09 | -0.33 | -0.09 | -0.13 | -0.57 | -0.37 | -0.08 |
| Imports | 0.38 | 0.50 | 0.30 | 0.27 | 0.45 | 0.05 | -0.49 | -0.49 | -0.35 |
| Prices | -0.28 | -0.22 | -0.12 | -0.19 | -0.08 | 0.37 | 0.79 | 0.70 | 0.36 |
| Nominal Exchange Rate | 0.28 | 0.57 | 0.55 | 0.42 | 0.22 | -0.20 | -0.45 | -0.43 | -0.48 |
| Real Exchange Rate | 0.26 | 0.58 | 0.57 | 0.44 | 0.25 | -0.12 | -0.38 | -0.42 | -0.49 |
| Cross-Correlation of U.S. GDP with | |||||||||
| GDP | 0.48 | 0.67 | 0.32 | 0.24 | 0.19 | -0.04 | -0.12 | -0.15 | -0.17 |
| Investment | 0.46 | 0.70 | 0.45 | 0.35 | 0.22 | -0.14 | -0.25 | -0.26 | -0.22 |
| Exports | 0.55 | 0.34 | -0.32 | -0.35 | -0.02 | -0.26 | -0.37 | -0.16 | -0.09 |
| Imports | 0.51 | 0.53 | 0.31 | 0.44 | 0.23 | -0.23 | -0.37 | -0.40 | -0.27 |
| Prices | -0.30 | -0.17 | -0.12 | -0.30 | -0.23 | 0.35 | 0.81 | 0.64 | 0.38 |
| Nominal Exchange Rate | 0.36 | 0.75 | 0.58 | 0.43 | 0.03 | -0.47 | -0.51 | -0.43 | -0.34 |
| Real Exchange Rate | 0.34 | 0.77 | 0.62 | 0.45 | 0.07 | -0.39 | -0.47 | -0.42 | -0,34 |
ANNEX II Data Sources and Definitions
Annual data
All data are in logarithmic form, seasonally adjusted. Source: International Financial Statistics (IFS).
Quarterly data
Real output, logarithm of real GDP, seasonally adjusted. Source: International Financial Statistics (IFS).
Real short-term interest rates, official cash rate (New Zealand), cash market (Australia), and the federal funds rate (U.S.) less the contemporaneous inflation rate derived from the consumer price index. Sources: Reserve Bank of New Zealand, Reserve Bank of Australia, and Federal Reserve Bank of St. Louis.
Commodity price index, logarithm of the ANZ commodity price index in New Zealand dollars. Source: ANZ.
Real equity returns, defined as
where rer denotes a real equity return index, ner is a nominal equity return index, and p is the consumer price index of the corresponding country. The nominal return is the total return (capital gain plus dividends) on the NZSE 40 index (New Zealand), the all ordinaries index (Australia), and the S&P 500 index (U.S.).
References
Backus, Kehoe, and Finn E. Kydland, 1992, “International Real Business Cycles,” Journal of Political Economy, Vol. 100, pp. 745–775.
Buckle, Robert, David Haugh, and Peter Thomson, 2001, “Calm After the Storm?; Supply-side Contributions to New Zealand’s GDP Volatility Decline,” New Zealand Treasury Working Paper 01/33.
Buckle, Robert, Robert Kunhong Kim, Heather Kirkham, Nathan McLellan, and Jared Sharma, 2002, “A Structural VAR Model of the New Zealand Business Cycle;” New Zealand Treasury Working Paper 02/26.
Burns, A. P., and W. C. Mitchell, 1946, Measuring Business Cycles, (New York: National Bureau of Economic Research).
Cardarelli, Roberto, 2002, “Financial Linkages and the Correlation Between Australian and U.S. Output,” IMF Staff Country Report SM/02/215.
Dungey, Mardi, and Pagan, Adrian 2000, “A Structural VAR Model of the Australian Economy,” The Economic Record, Vol. 76, No. 235, pp. 321–342.
Haywood, E., 1972, “The Dating of Post War Business Cycles in New Zealand: 1946-70,” Reserve Bank of New Zealand Research Paper, No. 4.
Haywood, E., and C. Campbell, 1976, “The New Zealand Economy: Measurement of Economic Fluctuations and Indicators of Economic Activity: 1947-74,” Reserve Bank of New Zealand Research Paper, No. 19.
Hodrick, Robert, and Edward Prescott, 1980, “Postwar U.S. Business Cycles: An Empirical Investigation,” Discussion Paper No. 451, Carnegie-Mellon University.
Kim, Kunhong, Robert Buckel, and V. B. Hall, 1994, “Key Features of New Zealand Business Cycles,” The Economic Record, Vol. 70, No. 208, pp. 56–72.
Kose, M. Ayhan, 2002, “Explaining Business Cycles in Small Open Economies,” Journal of International Economics, Vol. 56, pp. 299–327.
Kose, M. M. Ayhan, Eswar S. Prasad, Marco Terrones, 2002, “Financial Integration and Macroeconomic Volatility,” (unpublished, International Monetary Fund).
Kydland, Finn E. and C. Prescott, Edward 1990, “Business Cycles: Real Facts and a Monetary Myth,” Quarterly Review, Federal Reserve Bank of Minneapolis.
Lucas, Robert, 1977, “Understanding Business Cycles,” in K. Brunner and A. Meltzer (eds.), Stabilization of the Domestic and International Economy, Vol, 5 of Carnegie-Rochester Series on Public Policy, North-Holland, Amsterdam, pp. 7–29.
McDermott, John, Alasdair Scott, 1999, “Concordance in Business Cycles,” (unpublished, Reserve Bank of New Zealand).
World Economic Outlook, 2002, “Recessions and Recoveries,” International Monetary Fund, pp. 103–137.
Prepared by Eric Parrado (Ext. 3-4423), who is available to answer questions.
In the 1990s, national defense expenditure growth fluctuated by more than 10 percent on average. In contrast, education and health expenditure growth rates fluctuated around 2 percent.
The detrended series is only a proxy for cyclical GDP because no attempt was made to eliminate any irregular component in the GDP time series.
Between 1980 and 1995, the correlations between cycles are around 60 percent.
The effects of export and import price shocks to real GDP fluctuations have varied over time. The former shock has tended to have a relatively long cycle, while the latter, at least until the mid-1990s, has tended to be more volatile.
The hypothesis of a unit root in the process generating the series in first differences, based on standard unit root tests, is rejected.
See also Cardarelli (2002).
The VAR is estimated using four-quarter log differences for all variables, except interest rates, which are in levels. In terms of optimal lags, different tests recommend a diverse number of lags. For example, the likelihood ratio test (LRT) and the Akaike Information Criterion (AIC) and the Hannan-Quinn Criterion (HQC) suggest the use of two lags; while the Schwarz Bayesian Criterion (SBC) advises the use of one lag. The models estimated are specified with two lags. The unit root hypothesis for every series in the models is rejected at conventional confidence levels. Parameter stability tests across various subsamples suggest that the parameters of the models are stable.
