Matt Nolan

Agreement or no?

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David Cunliffe has stated that new prudential regulation by the Reserve Bank shows that they agree with Labour on the need to dump the monetary policy consensus.

I would say no.

Monetary policy and prudential policy need to be treated separately.  In the same way that fiscal policy and monetary policy are.  Monetary policy (achieved through interest rates) should stick to the consensus view of keeping inflation expectations anchored.

Prudential policy is meant to ensure that we have bank stability.  In this sense there may be some quantifiable social cost associated with systematic risk in the banking system, and that policy looks to internalize that risk.  Now, there may be a role for this – or I’ll go out on a limb here and say that there may not be.  However, this IS NOT an issue of monetary policy in the narrow sense.

Does prudential policy indirectly influence interest rates and the money supply – yes.  So does fiscal policy.  So does consumer confidence.  So does risk preference in society.  However, it is not monetary policy and it is not part of the reason for the Reserve Bank Act that Labour seems interested in tinkering with and adding “other goals too”.

I am not against Labour thinking about prudential regulation and other issues of policy.  I am against them trying to use actual monetary policy to achieve multiple goals, and I am against trying to use monetary policy to achieve any goal other than a stable and low inflation rate.  These issues NEED to be separated when discussing policy, or else we risk destroying a fully functional Reserve Bank Act.

Matt Nolan

Dear Rod Oram

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I read your article on monetary policy in the Sunday Star Times (thanks to a link from Rates Blog).  I disagreed with many of the things you said, but I really don’t think our conclusions are that separate when we look through the issues.  First on my disagreements:

  1. I don’t agree that monetary policy needs to change (so an opposite conclusion in some ways),
  2. It isn’t up to monetary policy to tame housing bubbles – we should be asking where the bubble came from,
  3. The high OCR didn’t cause the high exchange rate persee – it is more likely that some other factor was causing both (say strong demand for housing, which is based on other fundamental factors).
  4. The “speed” of the domestic and international concept has very little to do with anything, neither does the size of trade in our currency.
  5. Capital inflows are not scary beasts – it just means people are lending to us.  We should be asking why people are borrowing domestically and why that is too high (something you do get to at the end of your article).
  6. Prudential regulation is not monetary policy and is not part of the RBA in itself – I guess this means you would call me a purist.  However, we need to make the distinction between the two clear, or else we muffle the signals of monetary policy and make the good outcomes associated with this policy difficult to achieve.  My solution, separate the two cleanly – at least in terms of the statements they make.  That way people know what is what.
  7. I agree that ultimately there are imbalances in the economy, and we need to adjust other forms of policy to improve them.  Threatening the RBA in order to try and “achieve this” is not good – and should be shut out right now.
  8. When central bankers from Brazil don’t like the capital inflow tax (and they do it) it makes me suspect there is something wrong.  By taxing inflows we are constraining our own borrowing – if people are borrowing on the basis of actual costs and benefits then taxing it will hurt the economy.  It is better to look at the domestic issues influencing this then throwing in an arbitrary tax.
  9. A more stable exchange rate means more volatile export prices for most exporters – I don’t see how this is a good thing …
  10. Finally, we aren’t a centrally planned economy, and neither is the global economy.  Talking about “running the economy” in this sense doesn’t make much sense in itself – we should be looking at how our policies influence the choices, and ultimately the welfare of, our citizens.

Ultimately, we can make a case for a change in prudential regulation and tax policy in New Zealand on the basis of our completely different assumptions.  However, I don’t agree with the blame you have placed on the shoulders of the OCR.  Monetary policy is being blamed for a bunch of bad policy both domestically and internationally, blame it does not deserve.  It is receiving the blame because it can’t really answer back for itself.

So lets sit down and try to figure out the real issues the could be hurting New Zealanders, instead of running with the monetary policy scapegoat.

Matt Nolan

More good news for NZ!!

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Guess what.  The EU subsidies on dairy products, introduced at the start of this year, are GONE.

Now US, step up to the plate and dump yours.  Or are we going to move into a situation where the United States is more protectionism than Europe …

Matt Nolan

The carry trade and mortgage rates: Shifts and movements

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Anyone who has done first year economics will know about shifts and movements.  When I tutored the course I would make funny hand gestures trying to illustrate it, hand gestures that were mildly less weird then when I talk about price floors and ceilings.

Still, there has been a lot of banging on about the carry trade and mortgage rates, and I think some of it stems from a little confusion regarding shifts and movements.  As an example I’ll work with this post from the Standard (ht BK Drinkwater).

Note: This is being added to the inflation debate, as a discussion of interest rate determination in a small open economy.  Starting from the bottom, the combination of posts under that tag gives a fuller idea of what we are talking about with inflation targeting and our (narrow) view of monetary policy.

Read more

Matt Nolan

A couple of good articles on monetary policy reform

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Here are a couple of good articles on the monetary policy debate.  First from Australia (and this fine blog with more discussion here and here):

Meanwhile, the central bank’s primary focus on inflation recognizes that monetary policy needs to be based on a single instrument and policy objective. Pursuing multiple objectives with multiple instruments, as Labour now suggests, is a recipe for incoherent policy and poor economic performance such as New Zealand experienced before its path-breaking reforms of the 1980s.

And then there is BK Drinkwater, who has gone full hog discussing monetary policy issues with the Standard here and here.

I didn’t take Marty G’s post—or Cunliffe’s—seriously, because for all the storm and stress about “hot money” coming from overseas, there’s a certain obliviousness to the fact that for debt to happen, for mortgages to happen, for credit to happen, someone has to borrow in addition to there being someone willing to lend. Why ignore half of supply & demand?

This is THE point that is CONSTANTLY being ignored.  Never have I seen so many smart people ignore a demand curve for so long. 

Update:  I should point out that Westpac is also making the point on demand, good on you guys 😉 .  I don’t actually receive weekly updates from any of the other banks, if any of them are saying it as well could someone tell me in the comments and I’ll link.

Good work everyone.  Hopefully someone is listening …