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Why are Real Interest Rates in New Zealand so High? Evidence and Drivers

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Abstract
New Zealand real interest rates have on average over the past two decades been high relative to most other countries in the Organisation for Economic Co-operation and Development (OECD). This paper argues that New Zealand’s relatively high interest rates are currently the outcome of domestic saving and investment imbalances, and are less due to a risk premium being imposed by foreign investors. That is, New Zealand’s low rate of saving relative to investment make higher real interest rates necessary to maintain inflation within the target range in the face of higher domestic spending. Foreign inflows seek out the interest rate premium, rather than demand it as compensation for risk. Seeking out the higher yield, foreign capital flows into New Zealand and this puts upward pressure on the exchange rate. It is this relationship between the real exchange rate, exchange rate expectations and the real interest rate that has helped to cause New Zealand’s interest rate to deviate from the “world” rate for most of the past two decades.

Suggested Citation

  • Natalie Labuschagne & Polly Vowles, 2010. "Why are Real Interest Rates in New Zealand so High? Evidence and Drivers," Treasury Working Paper Series 10/09, New Zealand Treasury.
    • Handle: RePEc:nzt:nztwps:10/09
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    File URL: https://treasury.govt.nz/sites/default/files/2010-11/twp10-09.pdf
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    References listed on IDEAS

    as
    1. Michal Brzoza-Brzezina & Jesús Crespo-Cuaresma, 2007. "Mr. Wicksell and the global economy: What drives real interest rates?," Working Papers 2007-06, Faculty of Economics and Statistics, Universität Innsbruck.
    2. International Monetary Fund, 2003. "New Zealand: Selected Issues," IMF Staff Country Reports 2003/122, International Monetary Fund.
    3. Nils Björksten & Özer Karagedikli, 2003. "Neutral real interest rates revisited," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 66, pages 1-11, September.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Robert A Buckle & Amy A Cruickshank, 2013. "The Requirements for Long-Run Fiscal Sustainability," Treasury Working Paper Series 13/20, New Zealand Treasury.
    2. Nolan, Gulnara & Nolan, Matt, 2021. "Taxation, user cost of capital and investment behaviour of New Zealand firms," Working Paper Series 21108, Victoria University of Wellington, Chair in Public Finance.
    3. Nolan, Gulnara & Nolan, Matt, 2021. "Taxation, user cost of capital and investment behaviour of New Zealand firms," Working Paper Series 9461, Victoria University of Wellington, Chair in Public Finance.
    4. Philip R. Lane, 2011. "External Imbalances and Macroeconomic Policy in New Zealand," The Institute for International Integration Studies Discussion Paper Series iiisdp376, IIIS.
    5. Jean-Pierre Andre, 2011. "Economic Imbalances: New Zealand's Structural Challenge," Treasury Working Paper Series 11/03, New Zealand Treasury.
    6. Julie Fry, 2014. "Migration and Macroeconomic Performance in New Zealand: Theory and Evidence," Treasury Working Paper Series 14/10, New Zealand Treasury.
    7. Philip R. Lane, 2013. "External imbalances and macroeconomic policy," New Zealand Economic Papers, Taylor & Francis Journals, vol. 47(1), pages 53-70, April.
    8. Daan Steenkamp, 2010. "New Zealand’s imbalances in a cross-country context," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 73, pages 37-49, December.

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    More about this item

    Keywords

    Real interest rates; neutral interest rate; real exchange rates; Uncovered Interest Parity; internal balance; external balance; saving;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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