PTA’s, currency, and monetary policy
Recently I was sitting at my computer looking at Twitter, when the following popped up in my feed:
NZIER calls for changes to the RBNZ’s Policy Targets Agreement to combat the overvalued NZ dollar – http://bit.ly/Q6aOWX
I found this surprising, as earlier in the day I had read a piece on the NZIER site that I felt was saying something very different to this. It turned out it was the same article, however it was interpreted in different ways.
Let me state how I took the NZIER piece after several readings.
They stated that, due to the current PTA including several goals, the Bank had not reacted strongly enough to credit growth during the “boom” – essentially, concerns about the exchange rate had prevented them from appropriately responding to what was going on.
As a result of this, if we leave the PTA unchanged, the Bank requires other instruments in order to achieve the “multiple goals” it faces in the current PTA. Anti-Dismal recently had a post where Don Brash made the same point.
But what about the jazz about the exchange rate at the start
Yes, the article discusses in detail how the NZ currency appears to have been persistently overvalued – and that there has been a chronic imbalance between savings and borrowing. However, it never lays this down as the Bank’s fault – it merely says that the Bank is facing undue pressure about the exchange rate as a result of this.
As we have discussed a myriad of times, a PERSISTENT IMBALANCE is not the fault of monetary policy – it indicates that the real exchange rate is out of whack in NZ for real economy reasons. This could be fiscal policy, this could be an issue an issue of competition, this could be an issue of “impatience” by New Zealanders.
Macroprudential regulation can be used to help against these issues in a “financial stability” sense – and the article makes the claim that they can help monetary policy BY reducing policial and social pressure regarding factors monetary policy is uninvolved with.
The article DOES NOT say that we should change the PTA to deal with the currency directly – and if that was actually NZIER’s intention I would be more than happy to have a open, and long, discussion with them regarding why this is the case.
Perhaps the problem is the accumulated current account deficit? If so, how do we deal with that? By selling stuff: assets or goods+services. Assets are going all the time but our trade balance is not going to do the job with the exchange rate at its current level. We need to rebalance that deficit, which will reduce pressure on the currency. So we need to make our exports cheaper or imports more expensive.
The issue you have raised is about the real exchange rate – which is independent of monetary policy.
We have had this problem since well before the cash rate and inflation targeting, and well before the MCI (which included nominal exchange rate targeting), and well before the floating exchange rate regime. It is an issue of fundamentals – which we do need to understand – but it has nothing to do with monetary policy.