Story: Business cycles

Page 3. Causes and consequences of fluctuations

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International causes

International factors have been primarily responsible for changes in the direction of New Zealand’s cycles, notably commodity prices and exchange rate crises, although domestic influences have also had some impact.

Specific external factors which have triggered turning points in New Zealand business cycles – both classical and growth cycles – have included:

  • the Korean War wool boom of the early 1950s
  • the two oil shocks of 1973–74 and 1978–79
  • the Asian financial crisis of 1997–98
  • the sub-prime mortgage crisis of 2007–8, which originated in the US.

Domestic factors

Unusually severe climatic conditions leading to drought in key parts of the country have been important triggers on several occasions. Net immigration levels and residential housing cycles have also been important, as were the economic reforms of the mid-1980s to early 1990s. However, no major slowdown or recession appears to have been triggered by domestic factors alone.

Monetary and fiscal policy

Monetary and macroeconomic fiscal policy can lessen or amplify cycles. The evidence in this area is relatively new, and comes mostly from growth-cycle models. It seems that fiscal policy (government spending and taxation) has more impact than monetary policy (Reserve Bank control of the money supply) but that terms-of-trade shocks have had a much greater influence than either.

Business cycles and economic growth

There are compelling arguments to suggest that economic growth and business-cycle processes are inextricably linked, and for empirical and policy purposes should be treated in an integrated manner.

The fundamental drivers of potential economic growth over the medium to long term, such as technical progress and improved productivity, are independent of short-run business cycle movements. But these drivers can have an impact on individual cycles in the short term.

A period of economic growth may also coincide with the expansion phase of a business cycle.

Volatile business-cycle movements can hurt economic growth rates in the long term. On a number of occasions, short-term international and domestic economic shocks have led to considerable volatility in a country’s business cycles. This can create greater uncertainty, which hurts economic growth. But it may also inspire individual producers to adopt greater efficiencies and international competitiveness.

How to cite this page:

Viv B. Hall, 'Business cycles - Causes and consequences of fluctuations', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/business-cycles/page-3 (accessed 30 March 2024)

Story by Viv B. Hall, published 11 Mar 2010