I see that we are back to discussing this sort of stuff, fair enough. There is a Herald article with Cunliffe expressly mentioning that the RBNZ should reduce volatility in the exchange rate, and Brian Fallow discussing currency intervention following the Fed.
There are a few key points I would like us to keep in mind here:
- RBNZ policy depends on inflationary pressures. A higher dollar (all other things equal) lowers tradable prices, which may have a downward impact on inflation expectations, which in turn will lead the Bank to lower the interest rate. As a result, if people overseas start stimulating policy – then unless this leads to a significant pick up in external demand and commodity prices the Bank could well cut rates on its current mandate.
- For all the talk of volatility it is important to note that the NZ$ has actually been less volatile than the Australian dollar over the crisis years – surprising fact.
- Is it volatility in the exchange rate we care about, or volatility in the prices people actually face – remember that the “world price” of the things we sell overseas have been moving around violently, and the floating dollar has actually helped to reduce variability in the prices many exporters faced.
- Exporters and importers can hedge … combined with the fact that movements are smoothing external prices, this makes me feel that the volatility argument is often overplayed.
- Given that the exchange rate is seen as a random walk – and we have no idea what (short run) fair value really is a lot of the time – isn’t it just as likely intervention will increase volatility!
- If we are worried about the “relative price” argument (our dollar is too high because we are running a CA deficit that is “too large”) we should try to figure out what internal/external imbalances are causing that and deal with them directly. This is not a volatility argument – and it should be well thought through and communicated before anything happens.
- If we believe the “exchange rate is too high for manufacturers” we need to ask why – is it the relative price impact above (which we have discussed), or is it “Dutch disease” – something that I don’t really believe is a disease, but merely the diagnosis of a side-effect stemming from a POSITIVE shock.
We all know I’m a sucker for the status quo, but I have no problem discussing these issues. We should recognise that there are two perceived issues: (1) volatility, (2) the relative price. And then we should investigate why these things are happening, if there are associated welfare costs that we can reduce at a lower cost, and if so then clearly communicate why and what is going on.
Given my lack of faith in central government to achieve these things, as they enjoy using monetary policy as a political football, I am a strong proponent of the status quo.