The RBNZ sets a time path of interest rates – their current monetary policy settings are already taking the rebuild into account.

 I don’t disagree regarding transitional effects from policy, and the fact that there is an allocative issue in the housing market.

But I’m not sure what you are proposing here – landlords are taxed on rental income, so is it an issue of capital gains you are talking about?

 Taxing landlords so that they no longer get a free lunch isn’t hard. What is hard is the deflation in house prices that follows, and the honest hardworking people who find themselves upside down on their mortgages. It has to be done though, because the ongoing housing bubble is a colossal misallocation of resources that skews the whole economy. But it won’t be done because it isn’t exactly a vote winner…

 OK, so we’ve established that rebuilding Christchurch will be inflationary… Given the RB’s brief, are we going to see them step in to tighten monetary policy when this happens?

 Indeed. The current model with an “independent central bank” is an ideological choice — and we’re way out on a limb with respect to modern central-banking practice internationally (inflation the only target, interest rate the only tool in the box). The Greens challenge this, yet in this discussion you persist in trying to discredit them on *technical* grounds, as if they were obliged to work within the ideological strait-jacket imposed in the Douglas era.

But at last, in your reply to Kominsens, you are acknowledging the real issues. In particular, that it’s a valid political choice to maintain nominal growth through moderate inflation (though actual growth is even better).

Let’s look at what the Greens are saying about the exchange rate :

“In the four years to June 2012, exports from manufacturing have fallen by 12.4%, or $1.7 billion.1 Output from manufacturing in GDP terms has reduced by 9.1%, or $2.8 billion.2 In the same period, nearly 40,000 manufacturing jobs have been lost, a 16.7% reduction in the manufacturing workforce.”

To me, this clearly implies that there is a *huge* output gap! If you, and the RB, claim the contrary, I assume the reasoning is something like “this lost industrial output is gone for good, because it’s not competitive at the current exchange rate. And the exchange rate is not within our brief, so we’ll ignore it”.

But since the Greens are claiming that the exchange rate is a fixable problem, then the output gap reappears … at a lower exchange rate.

So yeah, I don’t see how you can write off the Greens’ proposals without examining the benefits (and explaining the costs) of lowering the exchange rate. Which involves understanding why it’s so high.

I see that elsewhere you have posted an analysis which implies that the high exchange rate follows high resource prices, and accompanies (cause/effect?) a real-estate bubble. The Greens claim that it is also fuelled by a carry trade, driven by excessive interest rates (this should be easily quantifiable, at least).

The emphasis of the Green policy release is on lowering the exchange rate, for which they propose several policy instruments that go well beyond monetary policy (including tackling the persistent housing bubble). It would be interesting to analyse that in more detail.

 We sort of need an idea about why things are happening, rather than just walking in and taking over the allocation ourselves 🙂

Tax and competition policy are good places for us to start