Deficits, RBNZ, and the IMF
The IMF, in all its infinite glory and knowledge, has decided to give New Zealand some advice on fiscal and monetary policy. Here is my take on their sermon from the heavens.
On the sage side they suggest that we need to come up with a plan for actually keeping our fiscal budget balanced in the medium term. This is true – fiscal deficits scare investors, and if we can’t keep a balance budget in the medium term, it isn’t likely that we are going to sort out our debt levels effectively.
On the other side they have decided to undercut the monetary authority of the RBNZ and suggest that they cut rates further than they have said they want to.
Now, although I am sure the IMF has the best of intentions – I would trust the analysis of our own Reserve Bank above them any day. Why? We are a small, open, economy – and this has a MASSIVE impact on the types of policies we should introduce during a recession. Now our Reserve Bank knows this – they live it, they breath it. I doubt the IMF has fully considered the special characteristics of such an economy.
Fundamentally, more of the shocks that NZ is facing can’t be solved with lack monetary or fiscal policy: a shock to credit markets and a terms of trade collapse – these are all “shocks” to our actual abilty to produce. As even I’ve said before – lower interest rates aren’t the medicine here.
So hopefully, the brave economists at the RBNZ can hold their head up following the IMF’s “whirlwind” tour of NZ and thell them to, proverbially, get stuffed.
Update: I forgot to mention that the IMF said NZ should look at quantitative easing. Now, if our central bank started printing money (which is effectively what this is) do you think that people would stick around to loan us money. I mean, our money supply growth is still strong, and inflation is still high (outside the band) – this would look like the RBNZ is willing to go way past the target band to ensure a return to economic growth. I believe that this is the sort of action that leads to hyperinflation … go IMF.
Update 2: I know that the brilliant Oliver Blanchard is chief economist of the IMF, and yes I do know that he is an incredible economist. However, I severly doubt he was the person working on the report for New Zealand – especially since he is busy. The fact is that policy that works in the US won’t work in NZ – we need to act given the cards we have been given. Their suggestions seem to have ignored these differences and said “do what the US is doing with monetary policy” >:(
And here’s their recommendation from a year ago:
“The current stance of monetary policy is appropriate. During 2007, retail mortgage rates became more responsive to the official cash rate, and this is having the desired effect of moderating house price inflation and slowing overall activity. More recently, tightening international credit conditions have also contributed to mortgage rate increases that should help ease capacity pressures. With significant risks present, the authorities and staff agreed that monetary policy should remain on hold pending clearer indications of the future path of the economy.”
Truth is that these IMF teams just listen to what policy makers are already doing, then parrot it back as ‘advice’. So if the IMF are ‘recommending’ that the RBNZ look at quantitative easing, you can be fairly sure that they’re already laying the groundwork.
@Miguel Sanchez
“And here’s their recommendation from a year ago”
A policy that completely made sense in the face of events at the time – I don’t think it is fair to expect the RBNZ to anticipate a policy failure on the part of the Fed 🙂
“Truth is that these IMF teams just listen to what policy makers are already doing, then parrot it back as ‘advice’.”
Indeed – that is often the case. However, the RBNZ has stated that it was quite strongly against quantitative easing in March – if they have already changed their mind I would be surprised …