Caitlin Davies & Prasanna Gai, University of Auckland

The global financial crisis has renewed interest in understanding financial cycles and their implications for the real economy. The resulting international debate has had important consequences for policy design in financial stability policy – for example, policymakers have increasingly sought to implement macroprudential instruments in an effort to ‘fine-tune’ the financial cycle.

Financial stability risks and inflation of the property market have increased substantially following the outbreak of the Covid-19 pandemic. This research reflects the level of risk that unsustainable house prices and the spike in monetary stimulus injected over the course of the pandemic could pose  for recovery in growth for New Zealand economy.

Key Policy Implications:

  • US monetary policy and financial conditions spill over to other countries, including to countries with floating exchange rates such as New Zealand
  • Macroprudential policies or capital controls may therefore play an important role, in concert with floating exchange rates, in helping insulate small open economies from global financial shocks
  • Greater financial integration may be beneficial – by facilitating better risk sharing opportunities, greater capital market integration may serve to safeguard the economy from the ebb and flow of shifting global risk appetite
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