2005-2010 How Monetary and Fiscal Policies Affected New Zealand

The fiscal and monetary policies implemented by the Reserve Bank of New Zealand Governor Allan Bollard led to New Zealanders living off foreigners savings and running up large overseas debt, making the country vulnerable to external shocks, and leaving the exchange rate highly overvalued (O’Sullivan,2006). This essay will explain how these policies from the period 2005-2008 failed to do what they were designed for and led to a consumer spending spree that pushed New Zealand into a recession. To answer the question we must first look at what these policies were designed for, monetary policies is the setting of money supply by policy makers (Principle in macro). While fiscal policies refer to government’s choices regarding the overall level of government purchases on taxes (Principles in macro). This essay will be structured into three parts. In part one we will see how the policies affected saving and investment, part two will discuss how productivity was affected and the final part will discuss how the economic growth of New Zealand was affected by the implementation of these policies.
Savings and Investment
In the first paragraph we will explain how these policies affected saving and investment in the New Zealand economy but we can never look at savings and investment seperately as we need savings in order to have investment. We can explain this first in simple terms as when an economy is running a current account deficit, this means in theory that net exports added with net inflow of income equals to a negative amount. As a result of this disposable income must be less than domestic spending, meaning that savings will be less than investment. As this is not possible this must mean that the country is receiving some of its investment from abroad. This is what had occurred in New Zealand but the investment from aboard had gotten out of control to a point where it had got out of control. Monetary policy affected as when the Reserve Bank of New Zealand had decided... [continues]

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