Treasury Releases September Working Papers

The Treasury today released twelve working papers in the September instalment of its Working Papers series.

This quarter’s set of papers includes:

New Zealand’s Production Structure: An International Comparison (Paper 03/16) Survey Reweighting for Tax Microsimulation Modelling (Paper 03/17) New Zealand’s Social Assistance System: Financial Incentives to Work (Paper 03/18) Asymmetric Information, Financial Intermediation and the Monetary Transmission Mechanism (Paper 03/19) Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation (Paper 03/20) Objectives, Targets and Instruments for Crown Financial Policy (Paper 03/21) Does Consumer Confidence Forecast Consumption Expenditure in New Zealand? (Paper 03/22) New Zealand Labour Supply from 1991-2001: An Analysis Based on a Discrete Choice Structural Utility Model (Paper 03/23) Encouraging Quality Regulation: Theories and Tools (Paper 03/24) A comparison of the NZTM and FPS models of the New Zealand economy (Paper 03/25) Work and Family Balance: An Economic View (Paper 03/26) The Ageing of the New Zealand Population, 1881-2051 (Paper 03/27)

A full list of the abstracts from the twelve papers follows.

The papers can all be found at http://www.treasury.govt.nz/workingpapers.

The Treasury Working Papers series contains work in progress on a variety of economic and financial issues. The series aims to help to increase understanding of Treasury and its work, and to make this work available to a larger audience. The working papers build internal capability, as well as generating more informed debate on key issues. The series has been running since 1998.

The views expressed in the Working Papers are those of the authors and do not necessarily reflect the views of the New Zealand Treasury. The papers are presented not as policy, but with a view to inform and stimulate wider debate.

03/16 New Zealand’s Production Structure: An International Comparison Iris Claus and Kathy Li

Abstract: The purpose of this paper is to compare New Zealand’s production structure in the mid-1990s to that in other OECD countries using input output analysis. Comparable inter industry transactions tables to the New Zealand data are available for Australia, Belgium, Denmark, Finland, Germany, Norway and the United Kingdom. The composition of total supply and value added is examined across countries. Backward and forward linkages, indices of industry interconnectedness, a value added production multiplier, a cumulated primary input coefficient for compensation of employees and a measure of import content of final demand output are calculated, taking into account direct and indirect transactions. New Zealand’s industrial structure is broadly similar to that in other OECD countries. Some differences arise as certain industries are more important in some countries. New Zealand’s exports appear to be more diversified and have a large value added content. Moreover, the return to capital, as measured by the share of gross operating surplus in value added, is high.

03/17 Survey Reweighting for Tax Microsimulation Modelling John Creedy

Abstract: This paper describes a range of ‘minimum distance’ methods used to compute new weights for large cross-sectional surveys used in microsimulation modelling. Extraneous information about a range of population variables is used for calibration purposes. An iterative solution procedure is described and numerical examples are given, involving comparisons among alternative distance functions. An application to the New Zealand Household Economic Survey (HES) is reported.

03/18 New Zealand’s Social Assistance System: Financial Incentives to Work Patrick Nolan

Abstract: This paper is a stock take of the financial incentives to work present in New Zealand’s social assistance system. The purpose of this paper is to provide a basis for research on problems facing the social assistance system and dilemmas that would be likely to arise when considering potential initiatives to address such problems. The current financial incentives to work contained in the social assistance system reflect efforts to tailor different financial incentives to different groups in the population. No single structure of financial incentives is appropriate for all people and at all times. It is therefore necessary from time to time to consider whether existing financial incentives continue to meet government objectives, such as encouraging work among different groups in the population. Improving the structure of financial incentives, however, defies simple solutions and requires trade-offs between competing and conflicting objectives to be made.

In order to set the scene for later discussion, this paper begins with a brief description of the evolution of New Zealand’s social assistance system. This paper then moves on to discuss the financial returns from social assistance programmes and the distribution of the financial disincentives to work present in the current social assistance system. A number of further considerations are then discussed, particularly accommodation and childcare costs and the length of time that people tend to spend on social welfare benefits. This paper then considers the need for trade-offs between policy outcomes when developing policy initiatives to improve financial incentives to work before presenting a summary of its main findings. Appendixes to this paper describe the programmes that make up New Zealand’s three-tier social assistance system, key features of the personal income tax scale, a method for calculating Effective Marginal Tax Rates (EMTRs), and TaxMod and the Household Economic Survey (HES).

03/19 Asymmetric Information, Financial Intermediation and the Monetary Transmission Mechanism Iris Claus and Arthur Grimes

Abstract: Macroeconomic models currently used by policy makers generally assume that the workings of financial markets can be fully summarised by financial prices, because the Modigliani and Miller (1958) theorem holds. This paper argues that these models are too limited in describing how monetary policy (and other) shocks are transmitted to the economy and points to new directions. The models are too limited because they disregard an information asymmetry between borrowers and lenders and the importance of financial intermediaries not only for individual depositors but the economy as a whole. Incorporating financial market interactions into macroeconomic models will enhance the understanding of the transmission mechanisms of monetary policy and other shocks.

03/20 Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation John Creedy and Guyonne Kalb

Abstract: The assumption behind discrete hours labour supply modelling is that utility-maximising individuals choose from a relatively small number of hours levels, rather than being able to vary hours worked continuously. Such models are becoming widely used in view of their substantial advantages, compared with a continuous hours approach, when estimating and their role in tax policy microsimulation. This paper provides an introduction to the basic analytics of discrete hours labour supply modelling. Special attention is given to model specification, maximum likelihood estimation and microsimulation of tax reforms. The analysis is at each stage illustrated by the use of numerical examples.

03/21 Objectives, Targets and Instruments for Crown Financial Policy Eric Hansen

Abstract: Crown financial policy is concerned with how the government manages the Crown’s assets and liabilities. The recently established New Zealand Superannuation Fund, which is projected to grow to around 45% of GDP over the next few decades, highlights that Crown financial policy is likely to become an important economic policy tool with potential to have a significant impact on New Zealand economic welfare.

The policy framework of objectives, targets and instruments is adopted as a basis for organising the theory literature relating to Crown financial policy. Applying this framework, seven distinct policy objectives are identified as potentially relevant to the future development of policy. Applying qualitative assessment criteria, it is concluded that four of the seven objectives should be the main factors that inform the design of alternative policy options. The four objectives relate to minimising distortionary taxation, time-consistency of policy, agency costs of government, and downside efficiency risks. The three objectives considered less relevant relate to policy neutrality, missing markets and risk management services. The four main objectives imply a range of targets could be adopted for the Crown balance sheet, some of which would be conflicting. The objectives of minimising distortionary taxation suggests targeting the minimum risk portfolio by building up financial assets and net worth whereas the objective of minimising the agency cost of government suggests placing an upper bound on government operating surpluses and limiting the build up of financial assets. Time-consistency and agency cost objectives tend to conflict because the former suggests the level of debt should be kept low whereas the latter suggests high debt levels.

03/22 Does Consumer Confidence Forecast Consumption Expenditure in New Zealand? Khoon Lek Goh

Abstract: This paper examines the ability of consumer confidence to forecast consumption expenditure in New Zealand. A two-step process commonly used by other researchers, which was developed by Carroll, Fuhrer and Wilcox (1994), was utilised. The two most widely followed and reported measures of consumer confidence in New Zealand – the One News Colmar Brunton Poll and the Westpac McDermott Miller Consumer Confidence Survey – were used. Lagged values of consumer confidence on its own were found to have some predictive ability for forecasting consumption growth. However, this predictive ability was greatly reduced when control variables – labour income, interest rates and stock prices - were introduced, suggesting that consumer confidence merely reflects current economic conditions. Because of this, consumer confidence provides little additional information above readily available economic and financial data for forecasting consumption. However, since confidence indexes are available in a timely manner compared to economic data, they still provide useful summary information for making assessments of current economic conditions.

03/23 New Zealand Labour Supply from 1991-2001: An Analysis Based on a Discrete Choice Structural Utility Model Guyonne Kalb and Rosanna Scutella

Abstract: This paper presents results for four separately estimated sets of discrete choice labour supply models using the Household Economic Surveys from 1991/92 up to 2000/01. The New Zealand working-age population is divided into sole parents, single men, single women, and couples. The labour supply models use imputed wages for the non-workers. Some of the preference parameters for work and income are made dependent on personal and household characteristics to allow for heterogeneity in preferences among households. In addition, allowance is made for unobserved heterogeneity in preferences. The estimated parameters for the different groups are used to calculate confidence intervals for expected labour supply and the probability of working at the different discrete hours points. The effect of particular characteristics on labour supply is illustrated by computing marginal effects across the samples. The wage elasticities fall within the range of values found in other studies.

Expected labour supply, predicted by using the estimated models, results in values close to the observed averages and confidence intervals around the expected values are reasonably narrow in most groups. The results are as anticipated and similar to results in other countries, with preferences for work being higher for people with higher education, who are in their thirties. Furthermore, for women the presence of young children decreases the preference for work. In addition to these variables, which are usually included in labour supply models, the “eligibility for New Zealand Superannuation” indicator and a “living with parents” indicator are included. For all groups, the delayed eligibility for the state provided superannuation scheme is found to increase labour supply. The indicator for living with one’s parents is found to increase labour supply for sole parents (indicating that living with one’s parents may be a childcare strategy), although the effect was not significant.

03/24 Encouraging Quality Regulation: Theories and Tools Kevin Guerin

Abstract: Achieving good regulatory outcomes normally requires high quality design, implementation and review of the regulatory regime. Major regulatory theories focus on concepts such as the public interest, the role of interest groups, and regulatory capture to explain why regulations come into existence. Regulatory design, however, exists at two levels. Downstream design involves creating a regime to give the appropriate incentives to firms and consumers. Upstream design seeks to incentivise regulators themselves to create and operate high quality regulatory regimes. This paper focuses on the latter.

The OECD has undertaken a major programme on regulatory governance to ensure quality in the design and implementation of regulations. Such measures are now widespread. New Zealand has gradually implemented these approaches including Regulatory Impact Analysis (RIA) in its decision-making processes. These measures are supported, and to some degree required, by increased interaction with Australian practices through institutions such as the Council of Australian Governments and the obligations of Trans-Tasman Mutual Recognition Arrangement. Achieving full integration of best practice that creates an environment for consistently delivering high quality regulation requires a broad and sustained focus on design, capability, incentives and follow-up.

New Zealand has attempted over the last decade to improve regulatory outcomes by focusing on the incentives on regulators. There is still scope for further improvement. Sustained progress on a number of mutually supporting initiatives, with continued reinforcement of the underlying messages and careful building of the necessary institutions and practices is required for continued improvement.

03/25 A Comparison of the NZTM and FPS Models of the New Zealand Economy Kam Leong Szeto, Paul Gardiner, Richard Gray and David Hargreaves

Abstract: This paper investigates and compares the dynamic properties of the New Zealand Treasury model (NZTM) and the current version of the Reserve Bank’s Forecasting and Policy System model (FPS). The main use of both two models is to produce macroeconomic forecasts. The NZTM model produces forecasts that are used as an input into the final forecast numbers presented in the Economic and Fiscal Update. The FPS model is used to produce the published forecasts in the Reserve Bank’s quarterly Monetary Policy Statement. Both models contain a number of judgements around the structure of the economy, the key shocks that impact on the economy, and how the economy evolves in response to these shocks. The paper concludes that one of the main differences between the two models occurs in the impact of a world price shock on the real exchange rate and subsequently on exports and imports. Another key difference is the mechanism through which the net foreign asset position returns towards equilibrium. In FPS, the external balance is partly attained by forward-looking consumers who adjust spending to reach desired wealth positions. In contrast, the real exchange rate is the key mechanism in NZTM for re-establishing equilibrium.

03/26 Work and Family Balance: An Economic View Jason Varuhas, Veronica Jacobsen and Lindy Fursman

Abstract: This paper uses an economic framework to analyse the basis for government intervention to promote a balance between work and family life. The way in which people balance their work and family responsibilities is becoming increasingly prominent on the policy agenda. Much of the available literature advocates government intervention with little, if any, consideration of the theoretical basis for intervention or empirical analysis of the effects of the policies. This paper uses an economic framework to explore the rationale for government policies to improve work/family balance. It finds that strongest economic grounds for government intervention are the effects that maternal work may have on children. The evidence, however, is not strong, and whether maternal employment helps or harms children depends to a large part on the nature and quality of the childcare the children receive while the parents are at work. A number of policies could be used to promote work/family balance, including leave, childcare, changes to working hours, efforts to improve the family-friendliness of organisational cultures and tax/benefit policies. The most significant factor affecting work/family balance appears to be the organisational culture of the firm. In general, if organisational culture is not, in fact family-friendly, family-friendly measures will have little effect.

03/27 The Ageing of the New Zealand Population, 1881-2051 John Bryant

Abstract: The paper reviews data on long-term changes in the age structure of the New Zealand population. It sets out trends and projections for the age structure of the national population, and for associated measures of dependency. It describes the influences on age structure of fertility, mortality, and migration. Disaggregated results on age structure are presented, including ethnic differentials, regional variations, and fluctuations within narrowly-defined age groups. Comparisons are made with other OECD countries. Uncertainty, the likelihood of continued life expectancy gains, and life expectancy and health at older ages are discussed.

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