Stock Market Brief Deck for "this does not happen often".pdf
Eco 113 assignment
1. Introduction
Since the global financial crisis (GFC), the New Zealand growth has been much weaker and
slower than it was perhaps 20 years ago. The economy has been characterized by the consumer
price index being lower than expected, non-tradable inflation has been less than 0%, several
adjustment being made to increase or reduce the official cash rate, and New Zealand dollar
exchange rate has been elevated compared to other global currencies. The business cycles
discussed include;
1. Global financial crisis (GFC) of 2008-2009
During this business cycle, there was run on the bank where the depositors lost confidence and
withdrew all the amounts that they had in the banks. In this case, all the banks had liquidity and
solvency problem. During this period, there was fluctuation of the aggregate demand and short-
run aggregate supply leading to recession where the real GDP exceeded the potential GDP and
the resulting effect is below-full employment equilibrium (Baumol and Blinder, 2008).
2. LAS SAS
B
Price A
Level
AD
Real
GDP
During this cycle, the real GDP of New Zealand is the part marked B which is the equilibrium at
the intersection between Aggregate demand (AD) and short-run aggregate supply (SAS). The
potential GDP is the LAS curve. In this case, the recessionary gap brought about by financial
crisis is the part marked B. In order for the economy to counter the recessionary gap then
monetary and fiscal policies must be formulated.
Some of the monetary and fiscal policy that were formulated during this business cycle include;
As a result of increase in inflation, The Reserve bank reduced the official cash rate by 575 basis
points, increase in international bank funding, postponement of personal tax reductions,
suspension of contribution to the superannuation fund, and the introduction of temporary deposit
guarantee for banks.
According to the Keynesian view where the macroeconomist suggested that the economy can’t
achieve full employment potential if monetary and fiscal policy are ignored. Thus in this case,
the Keynesian view offered solution to the GFC through the formulation of monetary and fiscal
policies. Similarly in this business cycle, economy can never be self-regulating as advocated by
classical view and monetarist view.
3. 1. Green shoot recovery. mid-2009 to mid-2010
After the reduction of official cash rate (OCR) by 575 basis points and the long-term interest had
also fallen, the economy showed some signs of recovery (Williams, 2017). The house price
inflation began to increase due to lower mortgage rate, annual CPI inflation had also reduced and
was on average 2% since GFC, and New Zealand dollar depreciated. The government announced
the reduction of Goods and services tax rate (Vegh and Vuletin, 2015), which resulted in
inflationary pressure and in order to reduce such pressure the Reserve Bank increased the OCR
by 50 basis points during June and July 2010.
2. Domestic caution and global uncertainty: Mid-2012 to late 2012.
After the measures applied in the strengthening of the New Zealand economy in the previous
business cycle, the economy looked weakened because there was a decline in household and
consumer spending (Ductor and Leiva-Leon, 2016). Also, in this cycle the housing market
slowed down. In February 2011, the situation got even worse as there was Canterbury
earthquake. The Reserve bank of New Zealand responded by reducing the OCR by 50 basis
points in order to offset the negative effect of earthquakes on business and consumers. In 2011,
the New Zealand dollar appreciated because of the global monetary policy that was eased. The
appreciation resulted in the CPI inflation declining even further. The aggregate GDP during this
period was moderate because the spare capacity was being steadily absorbed.
3. Commodity boom and construction upswing
During this cycle the economic outlook improved as the terms of trade with trading partners
were 40 years high as a result of increase in dairy products. The net immigration increased as
people came to look for work on construction of Canterbury (Gnochi, Lagerborg and Pappa,
4. 2015). The house price inflation started to rise mostly in Auckland as a result of low mortgage
rate. During this period, the government recorded expansionary effect for the first time since
GFC. Although the CPI inflation remained low at 2%, the GDP growth was higher than
expected. This caused the OCR to be increased by 100 points to lower the medium-term
inflationary pressure.
4. Persistently low inflation: Mid-2014 to present day.
The economic outlook was that inflation weakened in mid-2014 which caused a decline in
commodity prices mostly oil and dairy products (Lewis and McDermott, 2016). This resulted in
increased in household spending and the house price inflation also increased significantly. The
annual CPI increased in 2017 for the first time to 1.3% as a result of decline in commodity
prices. The New Zealand dollar depreciated in 2015 which contributed significantly to negative
tradable inflation. Similarly, during that period the net migration was high still which contributed
to increased labor output and this reduced the pressure on increased wages. In order to reduce
such inflationary pressure the bank reduced the OCR by almost 200 basis points from 2014 to
2017.
References
5. Baumol, W. J., & Blinder, A. S. (2008). Economics: principles and policy. Mason, OH, South-
Western Cengage Learning.
Ductor, L., & Leiva-Leon, D. (2016). Dynamics of global business cycle interdependence.
Journal of International Economics, 102, 110-127
Gnocchi, S., Lagerborg, A., & Pappa, E. (2015). Do labor market institutions matter for business
cycles?. Journal of Economic Dynamics and Control, 51, 299-317.
Lewis, M., & McDermott, C. J. (2016). New Zealand's experience with changing its inflation
target and the impact on inflation expectations. New Zealand Economic Papers, 50(3), 343-361.
Researve Bank of New Zealand. (2018). Monetary Policy Statement August 2018.
Vegh, C. A., & Vuletin, G. (2015). How is tax policy conducted over the business cycle?.
American Economic Journal: Economic Policy, 7(3), 327-70.
Williams, R. (2017). Business cycle review: 2008 to present day. The Reserve Bank of New
Zealand Bulletin, 80(2), 3.