Matt Nolan

Australia and New Zealand in monetary policy

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Sorry for my lack of posting recently, my high level of disorganisation is taking its toll at what is quite a busy time for some reason.

As a result, I will post today with a comment I wrote somewhere else – hopefully, one day I can do a real post on this issue 😉

Over at Money Illusion Marcus Nunes links to an interesting post comparing monetary policy outcomes during the GFC between Aussie and NZ.  One conclusion is that, during the GFC both central banks did some good work – but Aussie was better (from the market monetarist standpoint).

I stab down a reply stating that I think this is unfair on the RBNZ.  I list some reasons why and discuss.  Key points are:

  • I think that the potential output gap suggested are wrongish,
  • In per capita terms the divergence is much weaker,
  • Australia had more of a TOT boost – which needs to be taken into account in this framework,
  • New Zealand suffered a myriad of other “supply side shocks”, which even in the market monetarist framework are expected to lead to an ex-post deviation from trend even with an optimal central bank,
  • If we stretch things out for the latest data, and look in per capita terms, the RBNZ appears to have got us back to this “trend” once we were finally free of the effects of drought, earthquakes, and regulatory changes.

The one argument I can see pulled out against the RBNZ is the same one being pulled out about the BOE – that they changed the structural framework in banking without compensating for any current drop in money supply indirectly linked to this change.  However, even this is a bit rough – given the high level of uncertainty about the impact of those structural changes … in essence “ex-ante” they will have been taking this into account (they were saying it), the impact may have just been larger than they reasonably expected.