Dear Rod Oram

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.

  • Miguel Sanchez

    I thought that article was bizarre from the start. So now that monetary policy has become deeply politicised, we can have the ‘real’ debate about it? I don’t think so.

  • @Miguel Sanchez

    Very true. I especially love of the random statements coming out about how we “have to do something” because the Reserve Bank Act is 20 years old and other arbitrary things have fallen over.

  • Miguel Sanchez

    Exactly. The limits of what central banks can and can’t do have been proven time and again in the last 400-odd years, so don’t tell me that Sunday shopping and ‘teh internet’ have turned everything on its head.

  • @Miguel Sanchez

    I do have to admit – I enjoy the internet. Does that mean that I’ve destroyed monetary policy?

  • @Matt: Applying the trusty principle that if you’re not part of the solution, you’re part of the problem, I hold you personally responsible for the “obvious failures” of monetary policy.

    I’d clue you in as to what these failures actually are, but that would be getting off-message: I think we’re meant to pretend they’re self-evident.

  • @BK Drinkwater

    Of course they are self evident.

    1) There was a failure
    2) I existed
    Therefore
    3) I caused the failure
    Therefore
    4) Policies that change my behaviour in ANY way will improve outcomes