A century of financial crises in New Zealand

Factors such as domestic imbalances, external debts and currency mismatches amplified the more recent financial crises experienced in New Zealand, according to new research published by the country's central bank.

The paper, 'Global shocks, economic growth and financial crises - 120 years of New Zealand experience', analyses economic history to discern how well models in the international literature explain domestic events in that period.

The authors find the historical evidence backs the theory that financial crises can be avoided in periods following strong stints of globalisation if underlying policies and institutions are sound. They note that while the threat of a currency crisis following the first spate of globalisation was small, in the second era of trade expansion, weak fundamentals gave rise to greater vulnerability. Looking ahead, the authors use an out-of-sample prediction which indicates that improvements in policy areas that deal with currency mismatches, the debt-to-GDP ratio and international reserves will likely reduce the risk of a currency crisis, compared to a decade ago.

They caution, however, that fluctuations in the global business cycle can still have strong effects on small open economies, such as New Zealand. Two such factors cited are shocks to US real GDP, which serves as a proxy for real global GDP, and shocks to the terms of trade.

Click here to read the paper