Inflation in a Small, Fixed Exchange Rate, Open, Controlled Economy : A Model for New Zealand

This paper presents a preliminary simultaneous equation model capable of explaining New Zealand's post-war inflation. It is a model consistent with New Zealand having been a small fixed exchange rate open economy subject to very extensive controls over its balance of payments' current account items, and an array of controls capable of affecting capital account items. It is generally agreed that the controls, and especially those relating to import and export licensing, have been both tightly administered and effective. It is therefore reasonable to assume that New Zealand's rate of inflation and monetary policy are somewhat independent of world inflation rates. Six dependent variables have been incorporated for this preliminary model of New Zealand's inflation: the retail price level, the actual wage rate, the minimum wage rate, the demand for labour services, the supply of labour services, and the level of real output. Influences exogenous to the model are the level of import prices, the level of real government expenditure, the level of real exports, and the supply of money. The results are obtained from econometric estimation using annual data and the methods of ordinary least squares and two-stage least squares