Thats right… we don’t control the impact of other countries policy on ourselves.

BUT should we try to mitigate the impact that those policies might have on NZ.

By simply focusing on good domestic policy by keeping to an inflation target we have ended up with the problems we have.

Monetary policy might not be the answer… Maybe fiscal policy can be used to mitigate the distortionary impact of other countries polices.

I believe that the massive increase in Global credit and bubble economies has as much to do with Global imbalances in trade as it has to do with Wall street.

The disconnection between our exchange rate and our balance of payments, over a medium to long term time frame, shows just how distorted things are.

Surely we could come up with some strategies which enhance us as a trading nation, that makes our economy more robust, but does not take us down the road back to being a command economy…

I remember reading that in the 1950s’ and 1960s’ a current acct. deficit was “Headline” news.. and hotly debated in parliment.

We have a chronic Current acct deficit which looks like it will NEVER go away.

I’m not sure if a currency union with Austrailia is the answer.

Have u ever read the book “the Dollar Crisis” by Richard Duncan.
I found it very interesting.

Hi roelof,

“In theory Exchange rates should balance trade”

Not necessarily. Trade does not need to balance at any individual point in time, and trade differences can occur on the basis of differing time preferences for different countries.

When you say that other countries influence monetary policy outcomes for NZ you are right – they do. However, we do not control the impact of other countries policy on ourselves. Given what we can do, our best response is to focus on good domestic policy – which involves keeping to an inflation target.

If we wanted to control the exchange rate for some reason we have to ask “why?”. There is just no reason for a small open economy like New Zealand to intervene in its own currency. If we were sufficiently linked to movements in another country (such as Australia) we could make an argument for a currency union, and giving up independent monetary policy.

In theory Exchange rates should balance trade…. ( my understanding ).

In reality … in the Global economy… where Capital flows like a thirsty man drinking a glass of beer… exchange rates can seem to defy gravity..???

An important question is… Do the Major players allow their exchange rates to be completely unfettered ???.. I’m thinking of China, USA and Japan.
In the Global economy interest rates seem to be one of the mechanisms that cause Capital to flow. ( eg. the Carry Trade)

Therefore a Major Country that has very low , contrived interest rates, is actually impacting on the global flow of Capital..which then has a Major impact on Exchange rates in the smaller economies of the world.
I suppose what determines the extent of these Capital flows is the demand for credit from Individuals, Governments, Corporates..etc, in those smaller economies.
SO.. A Country like Japan ,through its own domestic Policies, can and did/does have an impact on New Zealands Exchange rate…??? ( thou indirectly… because of our insatiable need for Credit).

USA is now having the same impact by having such low interest rates.
AND then there is China, which basically has an export subsidy, by controlling its’ exchange rate at contrived low levels, …

The result of all this has been in incredible growth in Total World International Reserves.. I have heard the term..”exporting inflation”..(in a monetary sense)

In a Global sense this is related to Monetary Policy…????
eg. As Japans Banking system created Credit it was/is “exported” around the World.

So, in summary, I do think Global Monetary Policy has a impact on NZs’ exchange rate… and our demand for credit.
I get the feeling the Reserve Bank is conscious of the impact of changes in the OCR , relative to the interest rates in the Major countries, on our exchange rate and now takes this into account when determining changes in the OCR…???

The real irony is that to pay for the Toys we import..we really do need to export products. Has a fully flexible exchange rate ( nice way to say ..very volatile exchange rate).. been beneficial for our Productive sector.

Can NZs’ fully flexible exchange rate function properly in a global world where the major economies, patently, influence their own exchange rates.

Just my thoughts….

Cheers Roelof