Matt Nolan

Don’t start targeting asset prices, target inflation

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ANZ has suggested that we need to broaden the RBNZ target to include asset prices.  No.

Everyone seems to be mixing up the RBNZ’s monetary policy goals and its financial stability goals.  Now, inside of the financial stability targets a good look at asset prices and a dose of prudential regulation COULD be useful.

In terms of monetary policy this does not matter.

The goal of monetary policy is to shift around the interest rate and the supply of money such that “inflation” is constant.  Inflation is the growth in prices that has nothing to do with changes in productivity or changes in relative prices.

Is the CPI imperfect as a measure here, yes.  But it is better than an arbitrary measure that mixes up the price of goods and services in the economy with the price of assets (discussed here).

If I had to target something, I would target expected future growth in the adjusted labour cost index.  But that is a story for another day 🙂 [in fact this isn’t an issue I have covered in the inflation debate yet, I’ll have to have a sit down and think 😛 ]

3 replies
  1. Greg Ransom
    Greg Ransom says:

    This is brain dead.

    Hume & Cantillon & Hayek exposed the non-arguable truth that money expansion enters the economy somewhere, and necessarily distorts the economy in unsustainable ways, esp. via lengthy production goods like HOUSING, CONSUMER DURABLES, and long time period PRODUCTION GOODS.

    Money growth esp. via below natural rate interest rate manipulations can do nothing other than change relative prices across the time structure of production goods and production processes.

    Any other conclusion can be hardly anything other than economic illiteracy.

  2. Van sales
    Van sales says:

    One of the more interesting developments in central banking in the past dozen years or so has been the increasingly widespread adoption of the monetary policy framework known as inflation targeting.

  3. Finsofts
    Finsofts says:

    The goal of monetary policy is to shift around the interest rate and the supply of money such that “inflation” is constant. But after so many months now inflation is not getting a steady state but its path is in moderate rate. No one can bring this to stable state with out proper GOVT policies and proper management

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