Financial Stability in New Zealand: Three Essays

Abstract

In this thesis, I explore the past, present, and future of New Zealand’s financial stability through the estimation of New Zealand’s medium-term financial cycle; a close examination of New Zealand’s 1984 currency crisis; and a theoretical consideration of the interaction of monetary policy and macro-prudential policy in pursuit of financial stability outcomes. My results suggest that the nature of the New Zealand financial cycle changed fundamentally after the liberalising reforms of the mid-1980s, leading to greater synchronisation with international capital markets; that the 1984 currency crisis was the result of self-fulfilling market expectations, coordinated by the announcement of a snap election; and that using monetary policy to address financial stability (a policy approach also known as “leaning against the wind”) would only be appropriate if the macro-prudential regulator had a low level of risk-sensitivity, and if the macro-prudential instrument is well-tested and known to be effective over the financial stability objective.