International Evidence on Shock-Dependent Exchange Rate Pass-Through

New Zealand: Selected Issues

“…Domestic monetary policy shock can also capture the impact from housing prices. The reduction of interest rate can boost housing prices and the housing component in CPI directly.12 This model does not include the global interest rate, which is included inForbes et al, (2020), as it is difficult to measure the global neutral interest rate. Global monetary policy shocks discussed inForbes et al (2020) are reflected in global demand shocks in our identification.13 Related to this, using a small open economy Factor Augmented Vector Autoregression (FAVAR) model with the sample period of 1987Q4-2018Q1,Kamber and Wong (2020) find that foreign shocks account for more than 50 percent of variation of inflation gap in New Zealand, while domestic factors play a dominant role in determining trend inflation.©International Monetary Fund.…”