Monetary policy: Aussie vs NZ

At least one Australian and one New Zealand commentator feel that the RBNZ is too focused on inflation. They use the example of the RBA, which seems to be controlling inflation without trying to strangle the life out of the economy.

Do people agree with this? Is our Reserve Bank an inflation zealot? Or does our Reserve Bank have a better idea of the long-term costs of inflation, and as a result, is more interested in stamping it out?

I’m not even sure that the situations are comparable, Australia’s growth rates and productivity rates have far outstripped ours, giving their Reserve Bank more leeway to control inflation. After all March non-tradable CPI inflation was only 3.5%pa in Australia, compared to 4.0%pa in New Zealand, indicating a significant difference in domestic price pressure.

  • JamesE

    Call me a dimwit, but whats the big deal about the high dollar and why is everyone panicing about it? Wouldn’t it be a perfect time for New Zealand companies to be investing in plant and capital overseas while the price is comparatively cheap? Surely in the long term the currency would eventually balance out and New Zealand would be better off from it . All these OCR hikes are preventing them from doing so. Rediculous.

    I think Alan Bollard, Michael Cullen et el are living dinosaurs stuck in a 1970s timewarp where the economic system was a completely different beast to what it is now. I don’t know how a confessed proponent of the free-market can reconcile such an inconsistent position as support free flow of goods and services whilst at the same time defend the need for a draconian relic of bygone days as the Reserve Bank, particularly with its strict and arbritray targets in its current form and limited tools to maintain those targets. Why get punished for being successful?

    So predictable. Private bankers and currency traders must so love Central Banks. George Soros certainly did. lol

    Read this.
    http://www.cup.canterbury.ac.nz/catalogue/prosperity_denied.shtml

  • Matt Nolan

    Part of the reason the dollar is high is that the Reserve Bank has been increasing the OCR, so I don’t think the two contradict. I think the RBNZ would be happy if NZers invested overseas, it would improve our current account deficit.

    Why get punished for being successful? Nothing has been successful, growth has sucked. The problem is that price pressures have been high, and the only way to drain them out is to use the OCR.

    Now if you are criticizing the fact that the RBNZ aims to keep prices stable, I very much disagree. Uncertainty in prices negatively affects everyone in the economy. It hurts those that save and invest to the benefit of those who borrow and consume now. The negative impacts of high inflation are far greater than the negative impacts of a volatile exchange rate, even for a small exporting country like NZ.

    I have looked over that Bob Jones book before, it didn’t convince me. Read Keynes, and then read Friedman, then we will talk about the issue of inflation.

  • JamesE

    “Part of the reason the dollar is high is that the Reserve Bank has been increasing the OCR,”

    Exactly my point. Speculators love the predictablity of Central Banks. So much less risk involved.

    “I think the RBNZ would be happy if NZers invested overseas, it would improve our current account deficit.”

    Yep whilst making it more expensive to borrow.

    “Nothing has been successful, growth has sucked. The problem is that price pressures have been high, and the only way to drain them out is to use the OCR.”

    Growth has sucked, because every OCR increases lures in more speculative capital, which drives up the dollar cancelling out any gains made by the exporters. As well as overtaxing and unproductive spending by the government.

    http://www.nzherald.co.nz/topic/story.cfm?c_id=157&objectid=10444056

    “Now if you are criticizing the fact that the RBNZ aims to keep prices stable, I very much disagree. Uncertainty in prices negatively affects everyone in the economy.”

    Thats what the futures and commodities markets are for. A free-market will deal with any price uncertainty far more effectively than any central planning regulatory authority will ever be able to. The Reserve Bank has been doing a great job recently hasn’t it?

    Perhaps if there were no Central Banks the capital markets would shift away from unproductive speculation on the currency makets encouraged by predictable Fed/Reserve Banks responses, onto emphasis on productive investment in the futures and commodities markets.

    I’m sure there would be less capital in the market place as risk is the most constraining factor when it comes to financial transaction particularly when its speculative, but having a central body thats willing to bail you out removes a great degree of risk. The Savings and Loans Crisis and the collapse of Long Term Capital Management in the States and the collapse of the BNZ over here are good examples of that. Funny how people have such short memories. Bob Jones had it right where he described capital investors as fish, moving as one from one market to another as whim dictates. More like goldfish with its short memory and attention span.

    The reason why private banks love Central Banks is interest rates increase their profit margins so they have every incentive to loan out as much money as they can during a boom cycle in the full knowledge that Central Banks will hike interest rates in order to suppress inflation. Either way they win. They know that they’re in no danger as Central Banks were designed to prevent bank runs. What do they care if people lose their businesses or jobs as a result of the deflatinary spikes resulting from investors panicking?

    Take a look at this site http://tacticalinvestor.com/contrarian6.html

    “It hurts those that save and invest to the benefit of those who borrow and consume now.”

    So? If borrowers are aware that their ability to borrow is dependant on the interests of those that save there shouldn’t be a problem. Why should people be rewarded for saving merely, because they have excess capital? If anything would stimulate people to save, it would be the prospect of high inflation. Thats what happened during the depression isn’t it? Most authoritave economist hold the Federal Reserve Bank responsible for exaberating and prolonging the effects of the Great Depression. Both Kenysians and monetarists hold this view.

    “This is also the current conventional wisdom on the matter, as both Ben Bernanke and other economists such as the late John Kenneth Galbraith–the latter being an ardent Keynesian–have upheld this reasoning. Friedman also said that ideally he would “prefer to abolish the federal reserve system altogether” rather than try to reform it, because it was a flawed system in the first place.[38] He later said he would like to “abolish the Federal Reserve and replace it with a computer.”[39]”

    http://en.wikipedia.org/wiki/Federal_Reserve#Criticisms

    I believe a Central Bank allows a country to hide its economic structural definciencies and companies to hide their inefficiencies. Its easily possible for business and governments to consume 75-90 percent less resources, but theres currently no incentive for them to do so.
    http://www.wupperinst.org/FactorFour/
    http://www.factor10-institute.org/

  • Matt Nolan

    I don’t agree that anything was exactly your point in the first comment, as you were talking about how people should get over the exchange rate.

    I only said that bollard would like investment because you said he obviously hated it, not because I said his policies were consistent with increasing investment.

    Growth sucked when the OCR wasn’t moving, we have been running at below potential for the last two years, not the last six months. During 2006 our dollar fell substantially, and has come up again this year. Growth won’t improve until some imbalances in the economy are sorted.

    Also if you feel bad for exporters because the $ is up, remember that most exporters import some of their imports, implying that costs have fallen. A strong dollar is not as bad as exporters paint out.

    Ok, we had cornic inflation and deflation before central banks, and it made economic growth difficult. I also disagree that the Macroeconomy could deal with price uncertainty better than the central bank. If there is a single market, then individuals could deal with price uncertainty in that good, but when the domestic buying power of currency changes all the time we are left with a mess.

    It was not high private savings that helped worsen the great depression it was high public savings. The government cut spending thinking that it would stimulate private investment, but all it did was worsen the crisis. Trust me, inflation does not give people an incentive to save, as it erodes the value of their savings.

    I’m not convinced that removing the central bank would make the economy run more smoothly. It would simply lead to a increase in the volatility of prices. Personally I think keeping the rate of growth in prices constant is very important, insofar as it reduces uncertainty for firms and households. The best way to ensure that volatility in the price level is minimised is to have a Reserve Bank which has that as it’s only goal.

  • JamesE

    “….as you were talking about how people should get over the exchange rate.”

    They should just get over it. Inflation will cause a behaviour change and as a consequence will relieve pressure on the currency and hiking interest rates merely discourage productive investment from PRODUCTIVE investment from overseas which would counterbalance the stress on our dollar.

    “you said he obviously hated it, not because I said his policies were consistent with increasing investment.”

    no I said hes punishing them for it. Any savings accrued thanks to the high currency are lost as a result of the high interest rates.

    “but all it did was worsen the crisis. Trust me, inflation does not give people an incentive to save, as it erodes the value of their savings.”

    And Central Banks devaluing their currencies to help their exporters and for political expediancy doesn’t?

    Chinese Yuan. Check
    http://www.economist.com/finance/displaystory.cfm?story_id=9184053

    Japanese Yen. Check
    http://www.economist.com/finance/displaystory.cfm?story_id=8679006

    U.S. Dollar. Check
    http://tacticalinvestor.com/contrarian6.html

    “It would simply lead to a increase in the volatility of prices.”

    Business enterprises already account for this

    “Buyers anxious to minimise risk hedge against it via transactions with sellers who are happy to accept higher levels of risk, but a Tobin tax would reduce the amount of risk speculators are willing to accept.
    It would therefore limit the ability of exporters and importers to hedge their own risk by trading it with speculators happy to manage a higher level of exchange rate risk.

    A tax intended to improve exchange rate stability therefore ends up exposing importers and exporters to increased exchange risk.”

    http://www.treasury.govt.nz/taxreview2001/issuespaper/exec2.html

    Central Banks have a poor record for dealing with it in the past. 1920-1921 depression, 1929 Sharemarket Crash, Great Depression, high inflation during the Carter Administration, financial recession during the Reagan and Bush I era, 1987 Share Market Crash, dot com bust etc etc.

    The problem is that Central Banks are responsible for excessive extension of credit due to political expediancy and finance institutions exaberate the problem as they are able to leverage/hedge excessively as their degree of risk is much reduced thanks to the predictability and protection offered by the Central Banks.

    “It would simply lead to a increase in the volatility of prices.”

    Prices are changing all the time. They’re far less sticky as markets are far more open and less regulated now than any other time in history. Information is so much more freely available so it would be so much easier to predict and deal with price fluctuations and our tools for doing so are far better now.

    “The best way to ensure that volatility in the price level is minimised is to have a Reserve Bank which has that as it’s only goal.”

    Any money saved on price “stability” is lost when interest rates are hiked when they should have to be in the first place if were not for the irresponsiblity and inefficiency on the part of governments and financial institutions.

  • JamesE

    I posted a comment, but it didn’t go through. Maybe caught in spam filter?

  • Matt Nolan

    I’ll have a look 😉 sometimes these danged things take a while to go through

  • JamesE

    Above re. link to I See Red. Apparently the rep concerned is from a completely separate to the DDP. What the feck? I though only the Christian parties were stupid enough to split their voting bloc like that! Now its the monetary reform/republican parties as well! Idiots.

  • JamesE

    oops sorry wrong site. low