Matt Nolan

Translating Labour’s goals for monetary policy

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Labour has stated four goals for their special monetary policy.  Let me discuss what these mean in turn. [Note we already have two posts on this issue today].

Labour goals were:

  1. a stable and competitive exchange rate;
  2. reduced interest rates for businesses and home owners;
  3. continued priorities of price stability and low inflation;
  4. to guard against expectations of price rises.

So, with goal 1 they want to reduce the flexibility of NZ$ prices, which will lead to higher unemployment and a worse allocation of resources.  Furthermore, they want to keep the dollar low which implies subsidising exporters to the cost of households in the short-term.

With 2 they want to punish savers.

And with 3 and 4 they want to contradict themselves – as by limiting price flexibility and holding the exchange rate and interest rates down they WILL drive an increase in inflation expectations, dump price stability, and remove any chance of a low inflation environment.

Matt Nolan

Discussing inflation targeting and our exchange rate concerns

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In a recent speech (ht Rates Blog) Goff committed to destroying monetary policy independence and damaging the New Zealand economy if he gets into power.  That is all well and good.  However, I think part of the reason this issue has occurred is because of a lack of understand around the necessity of monetary policy independence and inflation targeting, and how all these other factors (like the exchange rate) are determined.  Lets discuss them a little bit here:

Read more

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

Go the All Whites

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New Zealand’s football (soccer if you are from the US) team is playing in their final World Cup qualifier tonight.  If they beat Bahrain they reach the World Cup finals for the first time since 1982.

Most of the members of TVHE will be going to the game tonight, and all of them will be watching in some form.  So we are thinking that everyone else should really cheer the All Whites on as well 😉

Go the All Whites!

Matt Nolan

Questions on NZ stimulus

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Bill English says it is now time for New Zealand to begin pulling back from its stimulus measures.  The RBNZ also says that they won’t lift rates because they expect fiscal stimulus to be withdrawn.

However, I have a question.  Other then the cycle way (which will still be constructed) and permanent tax cuts (which won’t go away) what stimulus did we actually take on?

If this is the only stimulus we did, and we are not withdrawing it, then isn’t the statement that we will withdraw unnecessary stimulus absolutely meaningless.

So, what DISCRETIONARY spending did the government add solely because of the recession?  [automatic stabilisers do not count – as the economic cycle deals with them itself]

Matt Nolan

When the title and article don’t meet

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Today in the Herald I saw a title “housing fall on the way”.  I expected that this would lead me to a report where someone was discussing why they thought the property market would weaken – an argument I would have been interested in reading.

Instead I noticed they were discussing this article by Westpac.  In the article Westpac says that low construction and interest rates will see house price growth move into double-digits by the middle of 2010.  This isn’t a house price fall.

In fact, the Herald article doesn’t really paint a picture of weakness – outside of a comment that a change in the tax treatment in property would influence house prices.  So where the hell did that title come from.

Let this be a lesson to all of us.  Don’t judge an article based on its title, as the person writing the title is often completely different than the person writing the article.  And obviously sometimes they write the title without actually reading the article 😉