The savings working group discussed the underlying “framework” for looking at what has gone on in NZ. For example It seems a lot of the economists that went into that decided that a movement towards a capital gains tax made sense – especially in terms of treating all “investment” the same domestically.

And any fundamental “imbalance” that exists (which would be argued from the magnitude of the CA deficits – in of itself, persistent CA deficits are sustainable as long as they run below nominal income growth) is to do with these structural factors – not monetary policy.

The RBNZ doesn’t “set” interest rates per see – they are, on average, going to be determined by the underlying demand for investment and willingness to save within an economy, and outside it. The persistently higher real interest rates and CA deficits is not the result of monetary policy – it is to do with structural issues in the economy.

The savings working group knew this, the best reports on the issue knew this, and this BERL report decided to ignore that – throw away any sensible view of domestic “investment demand”, and attack the RBNZ for being mainstream. That might be fine amongst hipster economists, but I don’t think hipster advice is what I want guiding the policy debate in NZ.

Against that I’d have to weigh:
– if interest rates are too high, that’s hardly encouraging NZers to borrow money. But we borrow anyway. How would lowering interest rates help with that?
– I’m very dubious about the graph being genuinely net. Firstly because the whole report is so unacademic that I don’t trust it, secondly because my recollection is that the world runs a balance of payments deficit with itself – i.e. even the real statisticians get it wrong

I think any discussion of these issues needs to be a bit broader ranging. We need to start off by defining our problem more accurately – here we seem to be starting with the solution and retrofitting a problem.

I think the problems we have (in this context) are:
– Property prices higher than most would like, and higher than other countries (e.g. USA)
– Interest rates higher than many would like, and higher than key trading partners (again, e.g. USA)
– Low national savings, and therefore low availability of local capital
– High exchange rate (in a PPP sense), and therefore imports cheaper and exports more expensive than we would prefer

I can see how some of these reinforce each other and therefore could be part of a cycle, but others seem to oppose each other, so using one as a cure for the other seems unusual.

1. Property prices. The contention seems to be that availability of money makes property prices high. Against that I say:
– high interest rates should make people less willing to borrow. Lower interest rates (a la Greece) seem to create asset price bubbles. The prescription seems to be likely to make the problem worse
– property prices seem to be largely driven by land scarcity and increases in the cost of construction. Microeconomic reform seems the answer to me, not financial reform
– scarcity of credit (if foreign borrowings weren’t available) could arguably reduce prices (supply and demand). Not sure many NZers would vote for the price of their biggest asset to reduce. Assuming they would, you could get the same effect by restricting the %deposit or other regulatory measures (although as a free marketer, I’d be against that, and I reckon it’d be easy to get around)

2. Interest rates higher. My thoughts
– interest rates are the price of money. Lower interest rates, less foreign money. Makes sense
– Less money available means less investment as well as less asset price bubbles. We need investment to continue to improve productivity – less investment is not really a good idea when NZs productivity is already dropping
– So, the real problem here is the choices NZers make with the money they borrow, not whether or not they’re borrowing
– Do we have systemic incentive issues (e.g. lack of capital gains tax), or do we have a psychological problem (NZers too risk averse)?

3. Low national savings.
– Is this really true, or is it more true that NZ is a small market, and few NZers invest locally (you’d be crazy on most investment theory to do so)
– Do we actually know NZers net overseas investment, or only the portion they declare to the taxman?
– Do wealthy NZers move overseas, taking their money with them? Is that still “foreign investment”?
– If so, is there a market for wealthy foreigners to move to NZ? Is that now local investment?
– Having asked those questions, does it suggest that concern about local v’s foreign investment is pretty silly? The key is that we have investment at all, drawing boundaries around it is a bit arbitrary

4. High exchange rate
– Logically this does mean more imports, less exports. And that is a problem
– But in a market sense, there must be an equilibrium. Is it really possible to just push down exchange rate in isolation?
– Pushing down exchange rates is basically a way of giving every NZer a pay cut and every holder of NZ assets a capital loss. Do people really understand that?

Overall, my gut feel is that intervening in this stuff is not a good idea. It’s full of unintended consequences, and in general keeping an open economy is a better idea. However, there does seem some room to play with incentives around the edges – or to reduce the govts current distortion through incentives. I think that could be a worthy area of investigation.

NGDP growth targeting is extremely close to flexible inflation targeting – I would argue that the main difference is “communication” of the target, which IMO gives the inflation target the edge (due to data revisions, and the priors I believe individuals actually make choices off).

The difference between growth and level targeting is how you perceive “failures” – that is the entire difference. Hence why the discussion between all these things in economics is actually over a surprisingly narrow range. In truth, the debate regarding policy is a lot smaller than many non-economists realise IMO.

I agree with your conception here – being open to arguments is the way to be.

There are four reasons I feel they are attacking inflation targeting directly though:

1) Previous writing that they have done regarding monetary policy has suggested that increasing interest rates to meet an inflation target increases debt and inflationary pressures – they have pointed at the same logic here, and it is that logic I’ve argued against

2) The NZ First policy they have made mention too does suggest moving towards targets on exchange rates at the cost of inflation targeting

3) They directly mentioned targeting inflation as now being irrelevant

4) They directly insult “mainstream” views – which are of course akin to some form of inflation targeting, straw man or not.

In terms of monetary policy, at present people seem to believe it can deliver things it can’t (increases in aggregate supply through a permanent lower dollar and magic) or they feel a slightly different “flexible” approach is appropriate. The second view is worth discussing, but hardly involves sides being strictly “wrong” or “right” – while the first view is merely due to misinformation about what monetary policy can do.

My fear is that these sorts of reports, and the weird descriptions politicians give to them, give the impression that we are facing the first sort of issue and a free lunch, rather than the marginal issue of monetary policy that is actually being discussed.

Much more important are issues of both financial stability (which I continue to hold should be viewed separately on communication, and non-cyclical, grounds) and the impact of fiscal and competition policy on the wider economy – it is almost as if the views of economists on allocative efficiency and relative prices have been ignored for so long that people don’t think these issues exist :/

There are different variants on NGDP targeting: some want to target NGDP levels, others NGDP growth rates. If we took an NGDP growth rate target, say 5%, then whenever expected real growth were low, they’d have to ramp up money supply to goose NGDP; if inflation plus real GDP growth exceeded 5%, they’d have to pull back.

We’d hashed some of that out earlier this year.
http://offsettingbehaviour.blogspot.co.nz/2011/04/rbnz-vs-sumner.html

I’m not convinced NGDP targeting is a great idea for NZ but it’s a defensible argument for a potential change to the PTA. What BERL’s proposing is nuts though.

In my limited understanding, the flexible inflation targeting vs NGDP target argument is a repeat of the “level” vs “growth” target from back in the day – definitely a worthwhile one to have, and I feel happy with policy either way.

I am not sure what the report attached to this post was aiming to do, but the way it misframes what has happened in NZ to merely criticise the “mainstream” is inappropriate and misinformation IMO.

I can imagine having a very reasonable discussion around inflation targeting vs NGDP targeting. But that isn’t quite what’s been proposed.