But that is only part of the point. In the long term it probably doesn’t matter too much whether inflation in NZ is 15% rather than 16% every five years. What is surprising is that we are so willing to allow for the pretence that a 15.9 percent change in the price level every five years could be interpreted as being consistent with the Reserve Bank achieving its primary function. According to section 8 of the Reserve Bank Act…” The primary function of the Bank is to formulate and implement monetary policy to the economic objective of achieving and maintaining stability in the general level of prices.” and section 9 ….”The minister shall, before appointing, or reappointing, any persons for Governor, fix, in agreement with that person, policy targets for the carrying out by the Bank of its primary function during that person’s term of office, or next term of office, as Governor.”

New Zealand has a minister and a governor who think that so long as the CPI doesn’t increase by more than 15.9 percent every five years, the situation is consistent with the objective of stability in the general level of prices. We have a central bank that has imposed some of the highest real interest rates in the world, and the most steeply inverted yield curve in the world, for the best part of a decade without being able to consistently reduce the inflation rate below 2 percent (so perhaps it is know-how, not willingness). We have a governor and Bank who has presided over a 24.9% increase in the CPI in 8 years. For all I know, we have governor who wears a grey suit because he thinks it’s a close approximation to black. To my mind, somehow, this is not a situation where we should be confident that true stability in the general level of prices is going to be achieved in the next five years; and I am not particularly confident that the Reserve Bank will prevent the CPI from rising by 16 percent. I wish I were.

Yar, as I said in my follow up comment I agree – as long as the Bank forecasts that it will stay in the band it is following its mandate.

I would ALSO note that nowhere in the post itself did I say this was even a bet about the mandate, just a bet on price level growth. In second comment where I said that was too loose, I agree. Note, that I have been saying that I think the Bank has never violated its stated mandate – both here and in the previous post where this got set. As a result, I am in agreement.

However, this raises a much bigger issue – if the mandate isn’t testable just how credible can it be? The reason I stated that ex-ante this was the only objective bet we could make is because ex-ante its the only objective bet we can make – if the Bank wants inflation expectations anchored within the band, a bet regarding whether they are (ex-ante) expected to remain within their mandate must assume that price level growth will average a level within the band.

IMO, the solution is to come up with a “true” measure of inflation that abstracts from relative price changes – and ensure that this stays at an appropriate level. I would also state that, given this, we would then need to decide BETWEEN an inflation band or a medium term inflation (point) target.

Good man, was worried no-one else believed the mandate would hold 😛

I agree I could easily use and say that the Bank still delivered on its mandate – given that the current mandate really just requires that they forecast they are going to stay within the band.

However, ex-ante the only bet you can make about the mandate MUST assume that ex-post they will stay within the mandate – the reason the sums of money are so low is due to the risks that, even though they follow their mandate (or don’t) there are other corresponding price shocks.

Also, you call 5 years a small period of time – but their mandate is over the medium term (which could be viewed as 5-10 years). As a result, I think the horizon is fair enough.

One thing I find VERY difficult about this time horizon is that they say “our target is over a number of years” and yet “the past is irrelevant” – there is something uncomfortable about this IMO, even though both elements can be justified in of themselves.

You’ll be glad to know that you will win the bet if most private sector forecasters are correct – I’m thinking that’s part of the reason I went against it 😉