A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Ryan, Michael; Szeto, Kam Leong Working Paper An Introduction to the New Zealand Treasury Model New Zealand Treasury Working Paper, No. 09/02 Provided in Cooperation with: The Treasury, New Zealand Government Suggested Citation: Ryan, Michael; Szeto, Kam Leong (2009) : An Introduction to the New Zealand Treasury Model, New Zealand Treasury Working Paper, No. 09/02, New Zealand Government, The Treasury, Wellington This Version is available at: http://hdl.handle.net/10419/205599 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ www.econstor.eu An Introduction to the New Zealand Treasury Model Michael Ryan and Kam Leong Szeto N EW ZEALAND T REASURY W ORKING P APER 09/02 S EPTEMBER 2009 NZ TREASURY An Introduction to the New Zealand Treasury Model WORKING PAPER 09/02 MONTH/ YEAR September 2009 AUTHOR/ S Michael Ryan Treasury PO Box 3724 Wellington 6140 New Zealand Kam Leong Szeto Treasury PO Box 3724 Wellington 6140 New Zealand Email [email protected] Telephone 64-4-917 6055 Fax 64-4-499 0437 ACKNOWLEDGEMENTS Thanks to David Galt, Samuel Direen, Paul Rodway, Tim Hampton Simon McLoughlin and Patrick Conway for helpful editorial comments. NZ TREASURY New Zealand Treasury PO Box 3724 Wellington 6008 NEW ZEALAND Email [email protected] Telephone 64-4-472 2733 Website www.treasury.govt.nz DISCLAIMER This document was commissioned by the New Zealand Treasury. However, the views, opinions, findings and conclusions or recommendations expressed in it are strictly those of the author(s), do not necessarily represent and should not be reported as those of the New Zealand Treasury. The New Zealand Treasury takes no responsibility for any errors, omissions in, or for the correctness of, the information contained in this Paper. ISSN 1176-9505 PERSISTENT URL http://purl.oclc.org/nzt/p-1237 Abstract The Treasury is the New Zealand government’s lead advisor on economic and financial issues. Part of this advice consists of providing the government with forecasts of economic and fiscal variables. Economic forecasts are important, not only as a basis for forecasts of tax revenue, but also in informing the government of the macroeconomic environment in which proposed fiscal policy settings will operate. The New Zealand Treasury Model (NZTM) is an important part of the economic forecasting process at the Treasury. This paper has three purposes. The first is to give readers an idea of the key features of NZTM. The second is to detail major changes to the model since the last published documentation of the model (Szeto, 2002). These model developments have enhanced NZTM to provide more detailed forecasts. Key changes include the disaggregation of deflators into the various expenditure GDP components, the introduction of consumption and capital goods imports into the model (rather than just treating them as intermediate imports) and the disaggregation of the inflation equation into tradable and non-tradable components. The final purpose of this paper is to outline briefly NZTM’s role in the Treasury’s forecasting process. JEL CLASSIFICATION C68 – Computable general equilibrium model E17 – General aggregative models: forecasting and simulation E2– Macroeconomics: consumption, saving, production, employment, and investment KEYWORDS Computable general equilibrium model; New Zealand economy; forecasting WP 09/01 | An Introduction to the New Zealand Treasury Model i Table of Contents Abstract ............................................................................................................................... i Table of Contents .............................................................................................................. ii List of Tables ..................................................................................................................... iii List of Figures ................................................................................................................... iii 1 Introduction .............................................................................................................. 1 1.1 The evolution of NZTM ...................................................................................................2 1.2 The remainder of the paper ............................................................................................2 2 The general structure of NZTM ............................................................................... 3 2.1 The steady state .............................................................................................................3 2.2 Dynamic path .................................................................................................................. 5 2.3 The interaction between the dynamic path and the steady state ...................................8 2.4 Assigning coefficient values in NZTM .............................................................................9 3 The production block ............................................................................................. 10 3.1 The production block ....................................................................................................10 4 The firm and the rest of the model........................................................................ 16 4.1 Business investment .....................................................................................................19 4.2 Capital and intermediate imports ..................................................................................19 4.3 Commodity exports .......................................................................................................20 4.4 Non-commodity exports ................................................................................................21 4.5 Labour market ...............................................................................................................22 4.6 Private consumption .....................................................................................................25 4.7 Imports of private consumption goods and services ....................................................27 4.8 Residential investment ..................................................................................................29 5 Monetary conditions .............................................................................................. 30 5.1 Inflation .......................................................................................................................30 5.2 Inflation expectations ....................................................................................................31 5.3 Exchange rate ...............................................................................................................32 5.4 Interest rates .................................................................................................................35 6 Deflators .................................................................................................................. 36 6.1 Relative prices ..............................................................................................................36 6.2 Prices .......................................................................................................................38 7 NZTM in the forecasting process .......................................................................... 39 7.1 The role of NZTM in the forecasting process ...............................................................39 7.2 Short-run forecasts .......................................................................................................39 7.3 Exogenous assumptions ...............................................................................................40 7.4 Judgement ....................................................................................................................42 7.5 Scenarios ......................................................................................................................43 8 Conclusion .............................................................................................................. 45 8.1 Conclusion ....................................................................................................................45 WP 09/01 | An Introduction