Matt Nolan

Goff announces end to RBNZ independence if Labour gets back in

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Either showing a complete misunderstanding about how monetary policy works, or showing that political power is more important than the welfare of New Zealander’s Phil Goff has stated that:

Today I am announcing the end of the consensus around the policy targets and tools of the Reserve Bank

Ignore him when he says that he is still interested in “monetary policy independence”.  Forcing the RBNZ to target near term growth and the exchange rate destroys the purpose of Bank independence in the first place.  Ignore him when he says he “wants to put money in peoples pockets” – as by cutting interest rates he is just transferring money from borrowers to savers.

Monetary policy should target stable inflation expectations, that is all.  All this crap from both the government and the opposition blaming the RBNZ for whatever is going on with the exchange rate is ignorant.  If our exchange rate is “too high” then as Treasury says the government could lower it by cutting the structural level of government spending, or by adjusting the tax system.

Furthermore, we have to ask, what do we mean when we say “the dollar is too high”?  The ultimate goal of policy is to maximise welfare (net happines) in society, not to “accumulate wealth” or “move the value of the dollar”.  If we ask ourselves “why” we think the dollar is too high then we realise that the problem isn’t monetary policy, but a host of other structural factors.

God we have discussed this stuff constantly (here, here, here, and here).  Phil Goff, I thought you were a pretty cool guy, but to be honest this makes me sick.

Disclaimer:  I am personally insulted by this blatent attack on monetary policy independence, and have written the post as such.  The opinions put down are not representative of anyone else I am involved with.

Others on it:  Kiwiblog, Rates Blog, Not PC, the Standard.

Matt Nolan

Should the Bank be responsible for economic structure?

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When discussing the latest OCR decision Bernard Hickey at the Rates Blog suggested that Dr Bollard should lift the cash rate in order to help “rebalance” the economy.

I have heard this suggestion from many, many, other economists as well – suggesting that this view is fairly mainstream.  Furthermore, Dr Bollard does keep mentioning the fact that “consumption” is too high and we need a switch away from consumption to exports and investment.

However, we can tell there is something fishy as soon as we listen to exporters.  They are saying they want a lower OCR, and a lower dollar, in order to stimulate exporting activity.  The fact that both a lower and a higher OCR can be justified on the basis of rebalancing tells us that there is something we are missing in this analysis.

Given my obsession with being contrarian (and the fact I actually do believe a different story this time) lets roll.

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Matt Nolan

October 09 OCR review: Moving forward gradually

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The RBNZ just told us that the OCR is unchanged.  No surprises.  The focus was on what would happen to this statement from September:

We expect such support will be needed for some time. As a result, we continue to expect to keep the OCR at or below the current level through until the latter part of 2010.

Well this happened:

In contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010.

So they have moved from implying they won’t lift rates till the last quarter of 2010 to now implying that the 3rd quarter is the most likely.  Could more positive information shift them earlier?  Maybe.  Will we see a rate increase in January (like the market was pricing in)?  Not likely.

Matt Nolan

Exchange rates and adjustment: What does it mean?

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With the mass of recent discussion on the exchange rate and the “structure” of the economy (here, here, here, and here) it seems like a good time to discuss exactly how the exchange rate matters insofar as discussing the economy.  Luckily for us, Paul Krugman has already done an excellent job of this.

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Matt Nolan

Smoke and mirrors: NZ talk on the currency

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The Rates Blog has reported that John Key has stated that he believes the RBNZ will leave the official cash rate unchanged until at least mid-2010, because of the high dollar.

Now, I prefer it when politicians completely stay away from monetary policy.  However, instead of banging on about that again lets look at why he made this statement.

  1. He realises that a higher exchange rate implies that monetary policy is tightening and as a result makes the likelihood of a lift in the OCR lower (all other things equal of course),
  2. He heard the RBNZ say that it won’t until late-2010 and has heard them mention the dollar,
  3. Bill English has been saying that the high exchange rate is an issue, and given that a higher OCR often leads to a higher dollar this could be problematic.

However, if these are the reasons for making the claim I still have one underlying concern – the high exchange rate isn’t the problem, the factors that lead the exchange rate to be too high are at fault.  The high dollar is a symptom not a cause.

Truly, I think the discussion of the dollar is simply smoke and mirrors.  If we have an issue it is because of some underlying structural issue in the economy.  As a result, we should be asking what the structural issue(s) is instead of bemoaning the dollar and asking the RBNZ to ignore its inflation mandate.

Matt Nolan

One instrument, one target

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Am I the only person left that believes in this rule of thumb?  From a Herald article on the IMF:

Policy makers will need to employ judgment to look at what is driving asset price movements and discretion to avoid costly policy mistakes

Now to be fair, they also suggest that maybe central banks should have some other tools than just the interest rate.  But the fact is that, for now, they don’t.  Banks should not be targeting asset prices with interest rates at the same time as they are targeting inflation – its a recipe for policy failure.

Sure, use prudential regulation and try to deal with information issues in financial markets and the such to try and ensure that people face more of the risk regarding their own actions.  But don’t use the interest rates to attack asset prices.

There is no discretion here.  The central bank is trying to hold inflation at a target level given their interest rate tool.  Just do that.  It is mechanical, yes.  It is boring, yes.  It will not prevent crises, yes.  It is best policy, yes.