RBNZ on “sustainable” growth

So on the 14th of July Alan Bollard said the follow in a speech to the Hawke’s Bay Chamber of Commerce:

Sustainable recovery, with rebalancing in demand and the economy’s productive base, is mostly a microeconomic matter. This means households, firms, banks and investors making the right decisions about where to allocate land, labour, capital and funding.

I agree, any issues with the sustainability of growth (read the composition of growth relative to the fundamentals of the economy) depends on the incentives provided to the individual agents in the economy.  If there are issues with the incentives we should ask, “where is the market/government failure here”.

Then on the 30th of July the OCR Review had this in it:

The level of the dollar in particular, is not helping the sustainability of future growth, and brings with it additional economic risks

A higher dollar will lead to lower GDP growth yes.  A higher dollar change the relative price of importing vs producing, leading to more importing yes.  A higher dollar promotes consumption and debt, yes.

BUT, the higher dollar may be the result of rising prices for our goods, or a stronger growth outlook, in which case complaining about it makes no sense.

Furthermore, even if it doesn’t seem justifiable we should recognise that it is a symptom of the imbalances, not the fundamental cause.  If our dollar is “too high” we need to ask what fundamental incentives are out of whack – what policy errors have been made, what institutions are causing problems.

For the RBNZ the dollar is about monetary conditions – if they think monetary conditions are too tight, cut the interest rate to promote consumption now.  Cutting the interest rate because of concerns about the sustainability of future growth makes no sense.  The sustainability issue is not a monetary policy issue.