New Zealand's risk premium

Burnside, Craig

doi:10.1080/00779954.2012.721690

Cited by 3 publications

(5 citation statements)

References 19 publications

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“…Foreign investors in securities denominated in New Zealand dollars demand a margin above the world rate. Burnside (2013) attributes this compensation to the possibility of a depreciation of the New Zealand dollar following a rare and extreme event. The higher is the ratio of public debt to GDP, the more vulnerable the New Zealand economy is to some unexpected event and the greater the risk of a devaluation.…”

Section: The Risk Premiummentioning

confidence: 97%

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Debt projections and fiscal sustainability with feedback effects

Creedy

Scobie²

2016

New Zealand Economic Papers

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This paper analyses long-term fiscal sustainability with a model which incorporates a number of feedback effects. When fiscal policy responds to ensure long-term sustainability, these feedback effects can potentially modify the intended outcomes by either enhancing or dampening the results of the policy interventions. The feedbacks include the effect on labour supply in response to changes in tax rates, changes in the country risk premium in response to higher public debt ratios, and endogenous changes in the rate of productivity growth and savings that respond to interest rates. A model of government revenue, expenditure and public debt which incorporates these feedbacks is used to simulate the outcome of a range of fiscal policy responses. In addition, the effects of population ageing and productivity growth are explored.

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Section: The Risk Premiummentioning

confidence: 97%

“…This assumes there are no income effects and the elasticity of L with respect to the net-of-tax rate, 1¡t Ã t , is constant at u 9 . For extensive references to the literature, and estimates for New Zealand, see Carey, Creedy, Gemmell, and Teng (2015).…”

Section: Incentive Effectsmentioning

confidence: 99%

Debt projections and fiscal sustainability with feedback effects

Creedy

Scobie²

2016

New Zealand Economic Papers

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“…Kisgergely (2012) and Felcser and Vonnák (2014)). Burnside (2013) regresses future exchange rate changes on the current interest differential between New-Zealand and the United-States. He first uses a simple interest differential model and extends it with risk factors.…”

Section: Introductionmentioning

confidence: 99%

Monetary Policies and Destabilizing Carry Trades Under Adaptive Learning

2020

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This paper investigates how different monetary policy designs alter the effect of carry trades on a host small open economy. Capital inflows are expansionary, leading the central bank to raise the interest rate, increasing carry trades' returns, and generating further capital inflows (carry trades' vicious circle). This paper shows how monetary authorities can mitigate or suppress this vicious circle, when agents do not have full information about the central bank's objectives. The best way to deal with the destabilizing effect of carry trades is to target both inflation and capital inflows.

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“…In a related context,Burnside (2013) reports that tests of the UIP hypothesis for the New Zealand dollar against the Australian dollar, Japanese yen, and the US dollar uncover more support for the theory if the Global Financial Crisis(2008-2010 period) is included in the sample. His study looks at the 1990-2010 period.© 2014 Economic Society of Australia…”

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confidence: 99%

“…Over longer horizons the evidence is mixed with a 10‐year horizon providing the strongest support for the theory. Burnside () explores the role of New Zealand's risk premium as a factor in the country's imbalances. In this context, he also examines whether UIP holds between New Zealand and various other countries, Australia being one of them.…”

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confidence: 99%

Monetary Policy and the Uncovered Interest Rate Parity Puzzle: Theory and Empirical Results for Oceania

Guender

2014

Economic Record

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This article offers a theory-based explanation for why highinterest-rate countries see their currencies appreciate, the so-called UIP puzzle. The central bank bases its target rule on the lag of the policy instrument and the CPI inflation rate. When combined with a stylised model of an open economy, the endogenous target rule can account for the systematic negative relation between the change in the exchange rate and the lagged interest rate differential. Foreign inflation and the foreign interest rate also affect nominal exchange rate changes. The model-based behaviour of the exchange rate is tested on New Zealand and Australian data with mixed results. I IntroductionAbsent any risk premium, the uncovered interest rate parity (UIP) hypothesis suggests that a positive interest rate differential (domestic interest rate minus foreign interest rate) should be compensated in full by a depreciation of the domestic currency over the term to maturity of the underlying short-term financial asset. In practice, the presumed one-for-one relationship between the interest rate differential and the expected change in the nominal exchange rate is not apparent in the data. In fact, many studies report a negative association between movements in the interest rate differential and observed changes in the nominal exchange rate. The observed violation of the UIP condition has been labelled the 'UIP Puzzle'. focus exclusively on whether uncovered interest rate parity holds between New Zealand and Australia over the 198-2008 (July) sample period. Their empirical study excludes the immediate period after the float of the Kiwi dollar as well as the peak and aftermath of the Global Financial Crisis. Following the standard atheoretical testing procedure, which relies on regressing the realised change in the nominal exchange rate on the lagged interest rate differential, they investigate whether UIP holds over the short term (90-day horizon) and over the long term (five-year and 10-year horizon, respectively). They find no evidence in favour of the UIP hypothesis over a short horizon. Over longer horizons the evidence is mixed with a 10-year horizon providing the strongest support for the theory. Burnside (2013) explores the role of New Zealand's risk premium as a factor in the country's imbalances. In this context, he also examines whether UIP holds between New Zealand and various other countries, Australia being one of them. He detects a positive yet statistically insignificant link between NZ and AUS dollar exchange rate movements and interest rate differentials over the 1990-2010 period and interprets this as evidence in favour of the UIP hypothesis. 207

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New Zealand's risk premium

Cited by 3 publications

References 19 publications

Debt projections and fiscal sustainability with feedback effects

Debt projections and fiscal sustainability with feedback effects

Monetary Policies and Destabilizing Carry Trades Under Adaptive Learning

Monetary Policy and the Uncovered Interest Rate Parity Puzzle: Theory and Empirical Results for Oceania

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