The RBNZ does have an implied financial stability role at present, they have been looking into the issue since well before the crisis struck.

I think there should be work on deciding the appropriate role of institutions in setting policy here – I am not sure the Reserve Bank Act even needs to change.

Good points. I agree with you, and the fact that targeting maturity mismatch requires a different tool is appropriate.

But, in the case of communication I still believe that the existence of two tools and two targets requires operational separation. The degree of communication between monetary and financial stability authorities prior to a decision is an issue that should be looked at – but it is no different than the idea of communication between monetary and fiscal authorities.

I believe that the decisions regarding monetary and financial stability issues should be kept separate, but there should be discussion between the groups – but mainly because I think the same should be true between the RBNZ and Treasury. If fiscal policy is going to be set some way, the RBNZ should be able to tell government “hey, that will push us to do this with interest rates to meet our mandate of stable price growth”.

In this sense, we still have operational separation between the groups – but the goals for policy are well set out and co-ordinated, so that policy doesn’t fluctuate randomly but the separate goals are communicated in such a way that individuals can form appropriate expectations.

“Financial stability objectives are then shown to make a monetary authority more conservative and more aggressive. Conservative as it sets higher rates on average. And aggressive because, in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. Keeping cuts short is crucial as bank risk responds primarily to stable low rates. Within the short span, cuts then must be deep to achieve standard objectives.”

Sadly there won’t be any move in this direction with National but I’m pleased to see all other parties looking at changes to the RB Act and presumably the Public Finance Act as well. Or I guess we can keep repeating the dose 🙂

Maturity mismatch – the risk of not being able to roll over debt as it matures – can’t be hedged. There is a case for regulation here, but it’s a question of quantitative targets – such as the core funding ratio that the RBNZ already imposes – rather than a price-based tool like the cash rate.

As I said in the previous posts (I still agree with what I wrote in 2009 – phew!), if communication is the deciding factor then I’d favour integration. Any conflicts of interest between inflation targeting and financial stability are best worked through internally before subjecting them on the public. Though of course having a single entity doesn’t guarantee that will be the case, as we’ve seen with the RBNZ.