Assessing Drivers of New Zealand's Natural Rate of Interest: Solving the Transition Paths
15:40-17:00, Friday, October 24, 2025
zoom Meeting: 95765195673
Passcode: 143547
Dr. Robert Kirkby is a Senior Lecturer of Macroeconomics at Victoria University of Wellington, New Zealand. He is presently the Undergraduate Program Director for the School of Economics and Finance. He earned his Ph.D. in Economics from Carlos III University of Madrid in 2014. He works on macroeconomic policy analysis. A substantial component of his research is the development of theoretical and computational tools to better perform such analysis. His papers have been published in journals including Computional Economics, Journal of Real Estate Finance and Economics, Macroeconomic Dynamics, and Journal of Macroeconomics.
We build a small open-economy overlapping-generations model (SOE-OLG) to understand changes in the natural rate of interest in New Zealand between 2000 and 2024. We do this by solving the model for repeated transition paths, with each year producing a new transition path based on agents' evolving expectations about the future. These repeated transition paths form the basis for the realised historical path of the natural rate of interest. We consider seven drivers of the natural rate of interest: the world natural rate of interest, the birth rate, productivity growth, government debt levels, old-age labour force participation, longevity and migration. We find that a lower world natural rate and declines in labour productivity growth have been important factors driving the decline in the natural rate of interest in New Zealand since 2000. The effect of changes in demographic drivers, while important in the long-run equilibrium, only have a modest impact on the natural rate of interest in the transition path. As a first extension we model the amount of inflationary pressure associated with the natural rate of interest along the transition path, to understand how the neutral rate of interest differs from the natural rate of interest. A second extension modifies the baseline model to allow for a premium on the return on private capital relative to the return on government debt. Modelling the premium allows the calibrated model to produce estimates of the natural rate of interest which are at a consistent level with other estimates for New Zealand.
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