By Michael Reddell, the paper is here (pdf):
Despite the huge, decades-long, and continuing deterioration in New Zealand’s relative productivity, the real exchange rate has not, on average, fallen. The persistently (and perhaps increasingly) “overvalued” exchange rate – itself a symptom of imbalances across the economy – is central to understanding why, despite the far-reaching reforms of the late 1980s and early 1990s, the large gap between New Zealand’s standard of living and those in other advanced economies has not even begun to close. The exchange rate hasn’t adjusted largely because average New Zealand real interest rates have, surprisingly, remained so much above those abroad. That gap, in turn, appears to reflect New Zealand’s own choices (including policy ones) which mean that at any particular interest rate (the “world interest rate”) there is a bigger difference here between desired investment spending and the available national savings than is typical abroad. Higher New Zealand real interest rates have simply been the rationing device, reconciling the conflicting desires. There is little evidence that our policy frameworks adversely affect savings more than those in other countries, and little sign that house prices can explain much, if anything, about New Zealand longer-term savings behaviour. By contrast, population growth seems to have been much more important than has previously been recognised. New Zealand’s population growth slowed sharply in the 1970s and 1980s, as more New Zealanders pursued better opportunities abroad. But the marked liberalisation in immigration policy in late 1980s and early 1990s resulted in New Zealand once again experiencing materially above-average population growth.In combination, the substantial real domestic resources required to accommodate a fast-growing population and the quite modest savings of New Zealanders appears to have crowded out (through higher interest rates and a high average real exchange rate) other productive investment. Materially higher productive investment, especially in the tradables sector, was probably required if the big challenge of catching up again with the incomes of other advanced countries, and reversing the decline in New Zealand’s relative productivity performance, was to be met. If the rate of population growth over the last couple of decades had been materially lower, that would have resulted in lower average interest rates and a much lower real exchange rate. And New Zealanders’ long-term income prospects would, most probably, have been much improved.