Indeed – shocks that lower our livelihood aren’t good.

However, “potential” in the long-run sense and “potential” in the way the RBNZ is using it are also a bit different – given that part of the reason for this drop in potential may be put down to temporary extrenal factors. 

I will admit I am currently unconvinced about their narrative regarding potential – and the only reason that narrative in itself exists is so that we can discuss sort-run movements in monetary policy.

Long-run movements are more an issue for description, and potentially policy discussion by Treasury.

In essence, we focus on interest rates and not potential because we control interest rates, we can use the short-run trade-off between unemployment and inflation.  We do not control, or have no real lever over, potential in the economy … outside of the equity-efficiency trade-offs that exist in structural policy.

Whatever the actual case about interest rates, isn’t the more interesting and worrying story that potential output is lower?  Everyone focussing on where interest rates go – that some will be relatively better off and some relatively worse off – seems secondary to the point that we’re all worse off with lower potential.

The eqm interest rate depends on time preference and growth in future income – this is true.  And when the June statement was made we definitely had the case where the current level of the OCR was less stimulatory, and that the issue of “insufficient demand” in the economy was less severe.  I could have definitely phrased that better!  I should have said potential output instead of potential growth.