Matt Nolan

A verdict on NGDP

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Simon Wren-Lewis has been discussing some of the ideas about NGDP targeting, and has reached his (tentative) conclusion:

My proposal is therefore the adoption of a target path for the level of NGDP that monetary policy can use as a guide to efficiently achieving either the dual mandate, or the inflation target if we are stuck with that. NGDP would not replace the ultimate objectives of monetary policy, and policymakers would not be obliged to try and hit that reference path come what may, but this path for NGDP would become their starting point for judging policy, and if policy did not move in the way indicated by that path they would have to explain why.

His proposal and his logic for getting there are things I all agree with.  Note for New Zealanders – we still have a positive cash rate and a flexible inflation target, so we wouldn’t need to adopt it as an intermediate target right now.  But it is a good issue to think about in case we ever get there 😉

Matt Nolan

QE discussion fun

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Last week I was away from the internet and work – as I was trying to finish off my paper for the NZAE conference this year.  So I missed this post by Cochrane (including a bunch of great comments) and a reply by Sumner.  Yah.

I’d note something that doesn’t come from these posts – some other people are simultaneously saying QE does nothing to increase NGDP, and that it creates asset bubbles.  This argument is far from clear to me, if QE is doing nothing because it is merely a swap of assets with the same yield with no macro impact then why do asset prices change?  Isn’t the increase in asset prices partially due to a lift in expected NGDP growth.  “Bubble” isn’t an answer to everything – we sort of need to understand where it is coming from.

I am sort of hoping some people may stumble here to tell me what I’m missing 🙂

Update:  AAMC on twitter reminded me about this post, which I’d seen as well.  The Cochrane post and comments are, to my mind, a discussion on the same sort of issues – and the Sumner post is a reminder that we have to think about the monetary policy rule and the expectations channel, and base money is special because it is a medium of account (I’m a bit nervous here, as I suspect T-bills are also seen as a medium of account in a large number of contexts, which takes us back to the Cochrane post).

All in all, the debate about QE as a mechanism is important.  Thank goodness we are not in this situation in NZ.

Matt Nolan

A tax by any other name

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Over on Frog Blog Russell Norman says we should have a rational debate about policy – in this instance the idea of having the RBNZ finance government spending by buying government bonds when the government increases spending.  Good, this is the right sort of attitude, we should be willing to debate and discuss everything – and to do so in a logical, clear, and transparent manner.

Now, as I’ve discussed that I don’t agree with his policy conclusions.  The post I’ve linked too was pretty clear on things – but I’m going to do a shorter post here.  Since that QE post I’ve talked with people who are pro this sort of financing, and in this post I am explicitly trying to talk about the trade-offs in a way that is consistent with the way they have 🙂

I would note that, getting the RBNZ to purchase bonds when other monetary policy actions are consistent with their inflation mandate will violate their inflation mandate – it will violate their “non-monetization” commitment in this sense.

This is important, as it implies that in the first instance bond purchase financing is essentially a tax.  This is something I will get to in part 5 of the tax series I’m popping up at the moment.  I’m only up to part 3 at present (out tomorrow), so the argument will have to wait till then.

Let me give a brief flavour though.

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Matt Nolan

Beware those bearing gifts of free exchange rate depreciation

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I don’t like to write about other economists, unless it is to say how sexy they are.  But I can’t let this slide

Ganesh, why, why are you willing to sell soundbites that do not cover off the trade-offs you are advocating?

The Berl economist told deer farmers in Wellington the bank should become a daily trader till the exchange rate fell to “something sensible for our export sector”.

Asked if New Zealand had the resources to do this, Nana replied, “It’s called a printing press. I’m not kidding,” he said to laughter.

It would be a transfer of wealth, from the people who consume imports, “the baddies”, to the people who earn exports, “the goodies”.

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jamesz

Monetary policy is not the interest rate

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It’s the rule, writes Christy Romer:

The regime shift we are seeing in Japan is just the kind of bold action that might actually succeed in changing both inflation and growth expectations a substantial amount. As a result, it may be an effective tool for encouraging robust recovery and an end to deflation.

Nick Rowe has been saying that for a while but, before we get too gung-ho, Romer cautions:

I don’t know if the Japanese experiment with monetary regime change will work. But I am confident that we will learn a great deal because they had the nerve to try.

Matt Nolan

Careful where we lay the blame

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Brian Fallow writing in his normal clear and intelligent manner has come out discussing the government budget.  As he says, a slump is not the time for “austerity” in terms of cutting back the size of government, and we should allow temporary deficits to help ease the blow – the point of automatic stabilisers is that they help out those that are struggling the most during a protracted slowdown.  Furthermore, I agree that the low level of long-term government bond rates does imply that government should be shifting investment forward now – something they seemed willing to do in 2009 but have moved away from since.

But, I have to slightly take issue with this:

Especially so since the Reserve Bank yesterday voiced concern at signs that the improvement in household saving rates may be stalling and that household debt is rising from a level already high relative to incomes.

The Government also argues that by running a tight fiscal policy it allows the bank to keep monetary policy looser than it otherwise could – lowering pressure on interest rates and the dollar.

However, as the bank reminded us yesterday, that silver lining comes with an increasingly ominous cloud in the form of rampant house price inflation, most notably in Auckland.

With the dollar as high as it is, the bank is reluctant to raise interest rates.

With the supply side of the housing market, especially in Auckland, unlikely to relieve the pressure on prices for years, and with gruesome examples in the Northern Hemisphere of what happens to an economy when a housing bubble bursts, at some point the bank is going to have to crush the demand side by raising interest rates.

If that coincides with fiscal contraction from a debt-obsessed Government, the effects could be unpleasant.

I don’t like where this logic is starting to go.  The RBNZ is responsible for “aggregate demand” in the economy.  If this is too low, then the RBNZ has set monetary conditions too tight, it is their fault.  Sure they may say it is not, some may say I am being unfair saying this … but if there is anything history has shown us, whenever we try to say “this time is different” with regards to a demand shortfall we usually end up coming back to blaming the central bank.

Relatively high debt levels and high house prices are not a monetary policy or demand issue.  They are an issue of financial stability, an issue of economic structure.  Yes, they create risks and can have negative welfare consequences.  Yes, competition, fiscal, and financial stability policy needs to account for them.  But monetary policy needs to take fiscal, competition, and financial stability policy AS GIVEN and then focus on “demand” from there.

Not dealing with demand because of concerns about these issues isn’t prudent, it is policy failure.  Blatant policy failure.  If you don’t believe me, ask someone who is both smarter and more articulate than me such as Nick Rowe.

Now, if the government remains on course and the RBNZ tightens monetary conditions to “fight the housing market” while it expects inflation to be low and unemployment high, they are explicitly violating their mandate and best practice of a central bank.  It is as simple as that.  I’m happy saying this out loud because they would not do that, they know these things, and will continue attempting to set monetary policy at the right level to deal with demand issues (as represented by their forecasts for inflation and unemployment over the next two years).  But given that the RBNZ does this appropriately, the government deficit does not matter outside of its impact on the composition of the economy.

If we want to criticise government policy during the recession, do it in terms of investment (it would have been a good time to move a bit more investment forward), and social policy related things.

Note:  If we believe that the response to interest rate changes will be very small, that in some sense investment demand is very “inelastic” then we can make a claim for government investment – we just need to be very clear on that AND we need to ask why in that case we still have a positive cash rate.  Remember, government investment here also works by driving up the “natural” interest rate … so through the same logic it will lead to a higher real exchange rate and higher government borrowing … unless the “cumulative impact” of rising demand pushing activity towards potential outweighs that.  And if we are using that “cumulative impact” argument for government spending then it also holds for a cut in domestic interest rates, just with a lower real exchange rate and compositionally more private sector activity.  So protip:  we can’t complain the exchange rate is too high and that government spending is too low at the same time!

Update:  Also after today’s unemployment and employment numbers I think people should be willing to rethink whether they think there is a “demand” issue in NZ going forward … 😉