Labour’s perspective on monetary policy

= Changing rhetoric to win votes.  I don’t know whether it makes me laugh or hit my desk angrily – I guess I’ll do both.

Listen to this:

Labour would broaden the Reserve Bank’s monetary policy targets, adding a requirement to aim for a stable currency, full employment, and the economic prosperity and welfare of the people to its existing inflation target

Yes, because determining how quickly to run printing presses can do all these things.

And has Labour figured out how to measure welfare in society?  If so I would like to meet them and congratulate them – that has been a vexing issue for economists AND psychologists for centuries.


“The Reserve Bank Act needs to be clarified to ensure the bank can use such tools primarily for the purpose of supporting Monetary Policy,” Labour’s associate finance spokesman David Parker said.

“Labour will make that change. Faced with rapid credit expansion, such as that in recent years, the change would cause the Reserve Bank to use prudential ratios, rather than rely solely on interest rates.”

Yes because, ex ante, when we have little information on the nature of the economy relative to its potential the Reserve Bank is incredibly well placed to determine the level of risk banks should take on.

Also, prudential regulation will change interest rates – acting like this is a “cost free” way to change monetary conditions is weird.

I realise the Bank is introducing prudential regulations, and I can see some potential for it theoretically.  However, I’m still not convinced at this level – and as a result definitely don’t think it should be made a central part of their mandate yet.  As I’ve said before, I think the organisations that determine monetary policy and prudential policy should be kept separate on transparency grounds.

You want more discussion on these issues – search the blog, we’ve written about these things repeatedly.  One day soon I may come back to it.  And if you think this “change” in policy make sense, feel free to email me/comment etc, but there is only the slimmest of chances I’ll ever agree with you – so keep that in mind.

12 replies
  1. Matt Nolan
    Matt Nolan says:


    It is just like those Aussies for sure. I would say that our experience doing what they are doing would be no different than our experience doing what we are doing now – it is just a bunch of “rhetoric” that won’t change the actual function of the RBNZ.

    Personally, I think Aussie monetary policy could do with more improvement than our own on the level of transparency – they don’t publish interest rate forecasts and the such.

    So the best case is that it is meaningless.

    However, there is a worst case scenario where it leads to some cost. If “targeting” multiple goals makes it harder to communicate what the Bank is doing, then it is harder for the bank to control inflation expectations – this in turn increases the welfare cost of monetary policies.

    This stuff about doing “blah blah and blah” is really just voter rhetoric – I guess things could have been a lot worse, they could have tried to introduce a bunch of really costly policies …

  2. Miguel Sanchez
    Miguel Sanchez says:

    Actually the RBA’s duties aren’t that specific; their Act says that it should use its powers in the way that, in the RBA’s own opinion, best promotes currency stability, welfare etc. If they think the best way to achieve this is through price stability (which they do, as does the RBNZ, or at least Brash did), then that’s what they do. It’s just as wishy-washy and naive as you’d expect from a piece of economic legislation written in 1959.

    Sparing the pretence that there’s even a hint of merit worth discussing in these proposals, I think the saddest part is how obsessed they are with fighting old battles. They’re railing against a housing market that’s already on the bones of its backside. (Even worse, the line about “restraining house price bubbles in Auckland” suggests they’re not even fighting the last housing boom, but the one before it – perhaps because it happened under a National government, rather than a Labour one?) The incentive to use rental properties as a shelter against the top tax rate (Labour’s dismal attempt to punish the “rich pricks”) has pretty much been removed. Meanwhile, commodity exporters are getting record-high prices, and as today’s GDP figures show they’re just about the only part of the economy showing any growth. So excuse me if I don’t shed a tear for the poor widdle exporters, since I’m still subject to a wage freeze that was decided last year entirely for PR purposes; meanwhile, my costs of living keep rising and would rise even faster if Labour had their way with the exchange rate.

  3. Rob Salmond
    Rob Salmond says:

    Matt – I understand that you’re unlikely to ever be swayed on this issue. But when you next address the issue I wonder if you could address the outcomes in regimes where reserve bank tasking is broader than just inflation? Australia and the US are two clear examples, but I think there are more. Has it worked OK for them? If so, why would it work there but not here? What can we learn from their experiences with broader targeting for monetary policy?

  4. Matt Nolan
    Matt Nolan says:

    @Miguel Sanchez

    Good points Miguel.

    @Rob Salmond

    Hi Rob,

    I agree that we should definitely sit down and try to understand what monetary policy is, and how it works, in context with how it works in other countries.

    My main concern is that this constant focus on growth etc from monetary policy misses a key component of what monetary policy is – it is policy regarding money. It is a “nominal” issue, not a real one.

    The Reserve Bank is neither a benevolent despot or a democratically elected group – it has no role in trying to change the structure or behaviour in the economy. It is solely a body that is tasked with running the printing presses – with the mandate to do so in such a way that the average price level grows at a predictable rate.

    If we think that structural policy is appropriate (which is a whole debate in itself) we should do it outside of monetary policy – that way we can be at least show some transparency with what we are trying to fiddle with and why.

    I would also note that monetary policy in Aussie and the US has effectively been the same as it has been here … they both either explicitly or implicitly following inflation targets. Hence why I was calling Labour’s policies simply rhetoric rather than anything else 😉

  5. Kimble
    Kimble says:

    I wholeheartedly agree with Labour but dont think they have gone far enough.

    The RBNZ should use the money supply to control immigration, standards in education, hospital waiting lists, and the impact on our economy from global warming.

  6. Miguel Sanchez
    Miguel Sanchez says:

    I think the Reserve Bank should also be tasked with bringing back Buck.

  7. Daniel Twaddle
    Daniel Twaddle says:

    I think that Miguesl Sanchez is probably right, that targetting price stability would be seen as the best way to deliver those other aims. But I do agree with the principles that Matt espouses, that it is all pretty flaky and if it were to actually result in something could be quite negative. Impact on the ground though: likely to be ignored by the RBNZ if ever made part of government policy.

  8. Matt Nolan
    Matt Nolan says:

    @Miguel Sanchez

    Hell yes.

    @Daniel Twaddle

    Yar, if I had to discuss monetary policy in itself I would say that stability of price level growth is the way to go for all the aims – and that is the way the RBNZ will take it, and why any change will “effectively” be ignored by RBNZ policy makers.

    The key cost in this regard comes from a muddying up of transparency – it is harder for the Bank to describe what it is doing when it has to cover off a multitude of aims. This confusion makes expectations harder to anchor, which has a welfare cost.

    On the plus side at least they aren’t coming out and saying they’ll set up anything particularly negative – like a military junta.

  9. Miguel Sanchez
    Miguel Sanchez says:

    To give a more serious answer to Rob S: I don’t really think there’s a debate to be had, because there is no central bank worth speaking of that focuses on anything other than inflation. Many of them have the same kind of feelgood wording in their legislation that the RBA and the Fed do, but they’ve overwhelmingly concluded that they can best serve these issues by targeting inflation, whether explicitly or implicitly. I suppose there are a few exceptions like the central bank of Zimbabwe (whose main goal seems to be to enrich its Governor), but I’m not sure it’s worth the effect of analysing their relative performance.

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