My feeling is the exchange rate is right on the mark and that it is vested interest groups ( i.e. exporters ) who are arguing for my fuel bill to go up.

 Hi,

Indeed – the long-term intervention by China can be used to justify a response by policy makers here.  It isn’t a certainty that domestic intervention could be required, but there is definitely a heavy case.

The reason I spoke out strongly against the exchange rate discussion here is because it is focused on QE – where QE is not aking to this, but is instead near term monetary policy.

You also point out a bunch of good points – I remember a Westpac piece where they discussed the impact of the top tax rate changes on the underlying price of property.

However, what does currency intervention by China mean for us?  We are a small open economy, a price taker.  If they continue to do this intervention, they are in essence subsidising exporters.  By doing so they push down the price of exports – improving our terms of trade.  There subsidy is an income gain for New Zealand.

To get an “inappriopriate” amount of debt, we need not just a subsidy, but effective interest rates to be pushed down.  That, combined with the fact its been happening since that late 1970’s, is why I find the idea behind the domesticly driven savings-investment imbalance more compelling.  Undeniably neo-mercantilistic policies have exaggerated this, but the issue existed prior – and given that the neo-mercantilistic policies involve overseas countries taking on a lot of the risk (by holding a bunch of our debt as long as they wantto support their intervention), I find it less concerning.

“Remember the exchange rate is a price – it is a “signal” of real imbalances rather than the cause.  Remember, it hasn’t been the “consumption” of cars, TV’s, and baseballs that has been excessive – it has been our “investment” in housing stock prior to the crisis.”

This is undercut but your earlier post of 28/8/2009 where you cited the possibility that other countries are suppressing their exchange rate. And USD2trn+ reserve accumulation by the PBOC is a good clue they are (I agree with you that the kerfuffle over QE is a furphy. It’s China and certain other USD peggers that are the issue). The SMH this week cited 23 central banks that are stockpiling AUD and there is speculation up to 80 are doing it.

As noted by Kolinek (http://www.voxeu.org/article/exchange-rate-undervaluation-can-neo-mercantilism-work), neo-mercantilism is a static loss, dynamic gain strategy that has worked well for China and others. The problem is, as per the article, neo-mercantilism is great when one or two small countries are doing it, but not so great when the world’s second largest economy does it (the last part is my gloss).

Hence Krugman, whom you cited, argued in the same link that for the US, exchange rate depreciation must be part of the rebalancing between I and S. (What he omitted is the possibility that an artificially low exchange rate may actually boost the savings rate, a proposition that I have yet to see modelled but which seems true of China).

Hence also Warwick McKibbin’s argument that if the Chinese want to acquire AUD for prudential reasons the RBA should just manufacture currency and sell it to them.

My net view is that the large S-I imbalance in NZ is due both to the real imbalance that you cited and also to foreign currency manipulation, in roughly equal measure. But why should we even care? Two reasons:
1. Under the present govt, the rebalance has only been happening at about 1%/yr, which is too slow for my liking. If we want to have an economy that looks more like 25-28 = -3, which are roughly the numbers for Australia from memory, it will take ages to rebalance. (NZ’s numbers are more like 14 – 19 = -5 according to p16 of the latest Treasury chart pack.) http://www.treasury.govt.nz/economy/mei/archive/pdfs/nzecp-charts-aug12.pdf 
2. I am worried that if English and Joyce take strong steps to increase saving, which I would support, the RBNZ will hit the zero lower bound and there will be a demand shortfall.

Finally, I tend to agree with your view that low saving by the household sector was not caused by flats screen TVs. It was caused by borrowing taken out with the intention of generating tax free gains in land prices. Expensive land – a pretty poor reason to run a massive CAD. (I remember seeing some modelling that showed that Labour increasing the top MTR to 39% added something like 15% to house prices!).

 Also to answer your question, I haven’t seen any recent literature on the Marshal-Lerner condition and the J-curve in NZ – I’ve seen stuff for China and the US, that’s about it 😉

 Hi,

Fair point – and something that people need to keep in mind when looking at whether a suddent change in the exchange rate will give them what they desire.

However, this is part of the reason why the focus is on the long-term real exchange rate rather than the near term impact of a level change in the nominal exchange rate.  Even if we talk about the long-term nominal exchange rate being held lower for “some reason” this doesn’t imply that the real exchange rate will be lower.

The persistent current account deficit (persistent is the key term here) is symptomatic of something structural – it might not even be a failure, New Zealander’s may just be “more impatient” than other people.  Furthermore, this is not an issue for monetary policy.