Reserve Bank of New Zealand

We highlight the importance of high and low states of household indebtedness for the transmission of monetary policy in Australia over the period 1994Q1–2019Q3. Working with a state‐dependent local projection model, we find that the dynamic effects of monetary policy shocks depend on household‐debt conditions: In the low debt state, output, investment, house prices and the household debt‐to‐GDP ratio strongly react to monetary policy shocks, while the responses of these variables are muted in the high‐debt state. Simulations from a stylised theoretical model show that high indebtedness triggers binding collateral constraints that shut off the home equity loan channel, thereby attenuating the consumption response to an interest rate shock. Our results suggest that (i) the home equity channel is active when household debt is moderate, but inactive when debt is high and (ii) this channel played a key role in the transmission of monetary policy in Australia over the sample period, potentially accounting for the diminished effectiveness of monetary policy under high household debt conditions.

This paper estimates cost pass-through rates for retail electricity prices in New Zealand. The dataset comprises monthly panel data for 340 electricity plans from January 2018 to May 2023. We estimate not only the pass-through of total costs but also the pass-through for the two main components of total costs — the lines costs (transmission and distribution costs) and generation costs. The generation cost is measured using a wholesale market price of generation. First, we find that vertically integrated retailers have a lower pass-through rate (for total costs) than independent retailers. Second, the pass-through rate is lower for generation costs than for lines costs. These two results are related: whereas vertically integrated and independent retailers pass-through a similar fraction of their lines costs, independent retailers pass-through significantly more of their generation costs than vertically integrated retailers. Our findings suggest that vertically integrated retailers respond to generation costs very differently than independent retailers. This may be because, for vertically integrated retailers, wholesale market prices for generation are simply an opportunity cost, while for independent retailers it is an actual cost. Our findings motivate further theoretical work into the different responses of vertically integrated and independent retailers.

How much does trade in services affect regional production specialization and welfare? Using unique Canadian trade data, we document that the size of inter-provincial service trade is comparable to that of good trade, and that net exports of services are highly correlated with the value-added share of tradable services across provinces. With a spatial model featuring domestic and international trade, we quantify the effects of service trade. Our results highlight that domestic service trade significantly promotes regional specialization, with heterogeneous welfare gains that reduce regional disparities. Conversely, international service trade generates more uniform welfare gains across provinces.

This work shows that some demographic groups end up underrepresented in household inflation expectations surveys due to item nonresponse. Nonresponses can lead to misleading inferences about inflation bias, and this paper shows how to correct for such nonresponse bias in average inflation expectations. These findings have important implications for how central banks use household inflation expectations measures, and how policymakers communicate with the population. One main implication is that policy outreach can be improved with more targeted communications.

Using the heteroscedasticity-based estimator of Rigobon and Sack (2005) to identify daily shocks of the Russia-Ukraine war, I assess and quantify the dynamic impact of the conflict on 86 open economies from January 2021 to November 2022. Within local projections, I show that war shocks caused considerable effects on macroeconomic conditions, financial markets, and global financial stability. Following a shock, weekly GDP fell significantly while inflation expectations and commodity prices soared, verifying the war's nature as a contractionary supply shock. While global stock prices fell, the long-term government bond yields remained stable, implying the crisis had not triggered a flight of capital to the US, and governments remained able to borrow at the pre-war costs of funding. More concerning, a range of indicators - implied volatility, credit default swap spread, cross-currency basis - suggest a significant and sustained increase in systemic financial stress. Through a state-dependent model, I show that energy importers and nations that share borders or have close trade and military ties with the belligerents were more affected by war shocks. Taken together, these findings may inform policy responses and assist households and firms in preparing for possible contingencies arising from the war.