A study into the consequences of using the Monetary Conditions Index as an operational target for monetary policy in New Zealand : a thesis submitted in partial fulfillment of the requirements for the degree of Master of Applied Economics at Massey University, New Zealand
The Reserve Bank of New Zealand (RBNZ) used a Monetary Conditions Index (MCI) as an operational guide for monetary policy from 30 June 1997 until 16 March 1999. This thesis uses four different methodologies to determine how this affected the implementation of monetary policy. The first is a survey that investigates the impact of the MCI regime on the way financial market participants viewed the RBNZ's policy stance. The second methodology consists of a series of roiling 10-week regressions that examines the relationship between short-term interest rates and the exchange rate. The third methodology is the autoregressive-distributed lag procedure, which explores the links between the RBNZ's policy actions, the MCI and its components, and external influences as represented by the United States 90-day bank bill rate. Finally, additional information about these relationships is obtained from block Granger causality tests, forecast error variance decompositions and impulse-response functions derived from a VAR framework. This study draws two major conclusions from the results. First, the MCI regime was responsible for an inverse relationship, which developed between the two components of the MCI and lasted from June 1997 until November 1998. This deepened the recession in 1998 by raising short-term interest rates when the currency depreciated after mid-1997. Second, the MCI regime did not significantly change the way the RBNZ's policy instruments impacted on the MCI or its components.