High dollar is a symptom, not a cause

BERL’s (cheif) economist Ganesh Nana has been telling people that the Reserve Bank needs to act to get the exchange rate down. I disagree in the most part and agree in another arbitrary part.

The fact is that the “high” NZ dollar is the result of a bunch of factors: peoples willingness to lend to us, the willingness to take on risk, our own willingness to accept their credit, a high terms of trade, our higher real interest rates, and a belief that the asset value of our dollar is higher than it was in the 90’s. There is no issue with the dollar doing what it does here.

I do agree that we have an issue of “production” vs “consumption”, namely we are taking on a great amount of debt and as a country this makes us vulnerable. But in this case the questions should be “why are we taking on all this debt?’ and “is there a problem with this debt accumulation?” (like we asked here) – not “is the dollar too high?”.

The Reserve Bank should not move to crack the $NZ down, instead we should all ask why New Zealand as a whole has taken more debt on and figure out if their are any structural issues in the economy that a change in government policy can improve.

Note: Another thing I would note is that the RBNZ can lower the dollar by trying to temporarily lower real interest rates (by printing money and dropping the nominal interest rate). This again promotes consumption above investment, and surely wouldn’t help correct any “imbalance” that we are focusing on here! Let us not forget the impossible trinity here (we discussed this here).

Focusing on the dollar is like focusing on easing a patients symptoms while leaving the underlying disease untouched!!

Update:  Scott Sumner does a small discussion on prices.  The exchange rate is a price, as he notes the important thing is “why the price has changed” not what the price is per see.  The price is not the underlying issue but the factors driving the price.

14 replies
  1. ben
    ben says:

    Poor Ganesh has been having trouble getting anyone to agree with him lately.

    Here’s another sure-fire way to get the dollar down: nationalise Telecom. Use the military to do it.

  2. Matt Nolan
    Matt Nolan says:


    I am sure a lot of people will agree. But that doesn’t stop his push to intervene in the currency market from being wrong.

    I have no doubt he is an excellent economist – but I disagree heavily with him on many monetary policy matters.

  3. rauparaha
    rauparaha says:

    I really like your medical analogy because I think it almost supports Ganesh. Structural issues are hard to fix and take a long time. If we can ease the symptoms at a reasonable cost while we work on curing the underlying problem, then why wouldn’t we?

  4. Matt Nolan
    Matt Nolan says:

    “I really like your medical analogy because I think it almost supports Ganesh. Structural issues are hard to fix and take a long time. If we can ease the symptoms at a reasonable cost while we work on curing the underlying problem, then why wouldn’t we?”


    In some terms I agree with you, however in this specific example I disagree.

    If an “artifically” high dollar was the only reason for domestic pain then sure, hitting the symptoms would be a good solution. However, in this case there is no direct link between the “symptom” (a moving price) and the “pain” because if we hold the exchange rate down other things will be forced to adjust to keep us structurally unadjusted – note impossible trinity.

    It is like a medical procedure that tries to reduce a symptom but does not influence the pain or the underlying medical issue.

    Finally, if there was a way to ease the pain from some issues (which is what we are doing by lowering interest rates at the moment) and the benefit of this exceeds the cost we should do it. But this isn’t the case.

  5. aps
    aps says:

    Is Ganesh Nana just having a bit of a rough patch or are his recent contributions reflective of his career to date? I have attended a seminar he gave to an industry group and found it pretty underwhelming, but otherwise have no experience of his work except for the recent defence of BERL’s alcohol report and the comments made on the NZD.

    Also, is he typical of the quality of personnel at BERL ?

  6. Matt Nolan
    Matt Nolan says:


    Dr Nana and the other BERL economists are very good economists. However, in this case they have a very different set of beliefs regarding how the world works to me. In the case of the BERL report it was the same thing.

  7. hampers
    hampers says:

    Meaning to say, they were only manipulating the dollar? If they like it up, they can make it. If they want to put it down, by all means they can. Oh what a pity. NZ is good in helping their constituents uplift their means of livelihood. This should be emulated by other countries.

  8. Rohit
    Rohit says:

    I really doubt that the Reserve Bank does really have anything in its own Hands. If it really does, then why is it acting as a slave?

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