Previewing the next issue of NZEP, the research journal of the NZAE🍋
Volume 58 Issue 3 covers monetary policy, fiscal and labour policies, and the electricity sector
I am James Graham, the editor-in-chief of New Zealand Economic Papers (NZEP), the journal of the New Zealand Association of Economists. This post is my first attempt to keep Asymmetric Information readers abreast of new research published in NZEP. I hope to continue with regular posts on interesting economics research from, about, and relevant to New Zealand.
NZEP Volume 58 Issue 3 (2024) presents a complementary set of papers on monetary policy, fiscal and labour policies, and the electricity sector. You can download and read the volume here
Monetary policy independence
In Monetary Policy Independence in an Era of Financial Globalization: What Theory Suggests and the Data in Oceania Say, Alfred Guender challenges the interpretation of observed positive correlations between small economies' interest rates and US monetary policy as evidence of limited monetary independence.
Using a small open economy model, Alfred demonstrates that under a floating exchange rate regime, an optimising central bank pursuing domestic objectives (inflation and output stability) will naturally generate interest rate movements that positively correlate with foreign rates.
He shows this co-movement to be an optimal policy response rather than a sign of constrained independence, holding true across various degrees of economic openness and even when uncovered interest rate parity doesn't hold. The theoretical predictions were tested using data from Australia and New Zealand (1999-2023), finding correlation coefficients of 0.42-0.45 between their policy rates and US Federal Funds rate changes, which align with the model's predictions.
However, Alfred found limited empirical evidence for the model's predicted relationship between US interest rates and real exchange rates in these economies, suggesting a more complex dynamic in practice.
China's approach to managing real estate market risks
In Coordination of monetary and macroprudential policies, land finance behaviour and risk prevention in the real estate market, Yue Song and Yu Zhang examine China's approach to managing real estate market risks through the coordination of monetary and macroprudential policies (the "two-pillar" framework), with particular attention to how local governments' land finance behaviour affects policy effectiveness.
The study was motivated by China's substantial housing price growth (averaging 9.69% annually in 35 major cities from 2009-2021) and its associated risks to economic stability. A key contribution is the paper's focus on how local governments' reliance on land sales for revenue ("land finance") potentially undermines policy effectiveness, as their fiscal incentives may conflict with central policy goals of controlling real estate risks.
The authors employ a novel measure of real estate market risk that incorporates stock market volatility in the real estate sector, using marginal expected shortfall (MES) methodology. Using quarterly data from 53 major Chinese cities over 2009-2020, the authors examine how the interaction between monetary policy, macroprudential measures, and local government land finance behaviour affects real estate market stability, considering both vertical fiscal imbalances and horizontal economic competition between localities.
Has NZ’s fiscal legislation reduced fiscal uncertainty?
In New Zealand’s lauded fiscal legislation: has it reduced fiscal uncertainty?, Michael Ryan and Mark Holmes study New Zealand's Public Finance Act (PFA), which combined the original 1989 Public Finance Act with the 1994 Fiscal Responsibility Act (incorporated in 2004).
While the legislation has been praised for improving fiscal sustainability, the authors examine whether it achieved its broader goal of reducing fiscal policy uncertainty. Using a structural vector autoregression (SVAR) model with stochastic volatility, they find that the legislation reduced net tax uncertainty by 32-46% and government spending uncertainty by 31-40%.
The authors explain that this reduction in uncertainty likely stems from the PFA’s requirements for increased transparency, multi-year projections, and clear "rules of the game" for fiscal policy conduct, which help reconcile ideological differences and reduce information asymmetry between the public and government.
Their study also reveals that under current institutional arrangements, net tax uncertainty has a more significant negative impact on GDP. The research contributes to the literature on institutional quality and fiscal volatility, distinguishing itself by focusing on a single-country case study, which helps avoid certain endogeneity issues present in cross-country analyses.
In the figure above, uncertainty is the square root of the time-varying variances of structural shocks. The blue shared area represents the 68% credible set. The solid line is the posterior median. The pink shaded areas are recessions.
Bargaining power and the labour share of income
In The Employment Contracts Act 1991 and the labour share of income in New Zealand: an analysis of labour market trends 1939–2023, Geoff Bertram and Bill Rosenberg reexamine New Zealand's labour market trends from 1939-2023, focusing on why the aggregate labour income share shows no clear break around the 1991 Employment Contracts Act (ECA) despite qualitative evidence suggesting it was a pivotal anti-labour turning point.
The authors resolve this puzzle by decomposing the labour share into two components: the "wage ratio" (compensation per employee relative to national income per adult) and the employment rate. This decomposition reveals that the ECA did mark a decisive shift — while the pre-1992 period saw rising employment rates matched by rising labour shares, post-1992 featured rising employment alongside a suppressed wage ratio, indicating a fundamental change in labour's bargaining power.
The paper also examines this pattern across gender lines, industry sectors, and international comparisons, finding that while some other OECD countries showed similar "hump-shaped" patterns in their wage ratios, New Zealand's experience was distinct enough to support a country-specific explanation focused on the ECA and associated policy changes.
The analysis suggests that conventional labour share measures may mask important shifts in labour market power dynamics when not decomposed into their constituent parts.
Retail electricity prices and market shares
In Retail electricity prices in New Zealand: recent trends and the relationship to market shares, Peter Gibbard and Cameron Grubb study competition dynamics in New Zealand's retail electricity market from 2018 to 2023 by constructing a novel monthly price series disaggregated by retailer and region — filling an important data gap that had existed since 2014.
The authors track prices and market shares of the five largest retailers (the "Big Five") versus smaller competitors (the "Small Five") across 34 regions. Their key finding is that while smaller retailers initially gained substantial market share by offering lower prices, the price gap between big and small retailers narrowed significantly over the period (from NZ$14.24 to NZ$4.19 on average), coinciding with a stagnation in market share gains by smaller retailers after September 2021.
Despite evidence of consumer switching costs and inertia in the market, the authors find a statistically significant negative correlation between relative prices and changes in market share, suggesting price competition does influence consumer behaviour. However, the narrowing price gap in later years may indicate weakening competitive pressure on incumbent firms.
The authors position this work primarily as providing a foundational dataset for future research, particularly for more formal econometric modelling of consumer search and switching behaviour in retail electricity markets.
Scale efficiencies in electricity distribution
In Scale efficiency gains in utilities? The case of electricity distribution in New Zealand, Tom Stannard and Philip Barry examine whether mergers and acquisitions in New Zealand's electricity distribution sector led to cost efficiencies through economies of scale.
Using data from 29 regulated electricity distribution businesses (EDBs) from 2013-2022, the authors find that increasing operational scale alone does not significantly reduce unit costs when controlling for population density.
While simple analysis might suggest that larger operations have lower costs, this relationship becomes statistically insignificant once density is accounted for. Instead, the key driver of cost efficiency is the population density of the service area - a 1% increase in density is associated with a 0.45% decrease in unit costs. This finding holds across different measures of size (energy delivered, customer numbers, and capacity).
The authors argue this makes intuitive sense given the capital-intensive nature of electricity distribution: expanding customer numbers without increasing density requires more infrastructure investment, while higher population density allows better utilisation of existing capital stock.
These results challenge common policy assumptions about merger benefits in infrastructure sectors and suggest policymakers should focus more on service density rather than scale when considering industry restructuring.
By James Graham
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This is an excellent initiative James. There is so much valuable research appearing in NZEP that warrants much wider dispersion.