RBNZ puts its macroprudential tools into perspective: The case of the prior housing cycle

I see that Chris Hunt at the RBNZ has discussed how the current suite of macro-prudential tools may have been utilised during the prior housing cycle.  Interesting stuff, and giving it some historic context helps to give us all some perspective on how and why the tools may be used.

I’ve seen Gareth Vaughan and Brennan McDonald throw down interesting posts on the issue following the release.

All very good.  The only thing I have to add given my cursory glance at everything is this.  Don’t read too much into the results the RBNZ has thrown down – they are saying these policy may well have had some impact on the financial cycle, but many of the other complaints out there about the lack of competitiveness of exporters, a perisistently high dollar/interest rates, and our general propensity to borrow heavily to invest in the non-tradable sector are not magically “dealt with” in this situation.    Understanding these issues involves a different set of arguments.

These issues require analysis, and if required solutions, based on an understanding of those issues.  Not an overtly mechanistic and complicated form of fine tuning.  What the RBNZ has done here is appropriately talk about a specific issue – and that is great.  But let’s keep it in context 😉


This was interesting:

In hindsight monetary policy – the only policy lever available at the time to address cyclical economic pressure – was too slow in responding to resource and associated inflation pressure

Now this isn’t policy failure – at the time people were not truly forecasting activity and inflationary pressures to be as strong as they were.  If anything it illustrates the limits associated with forward looking policy – and shows that it is a touch unreasonable to expect ex-post “perfect” policy ex-ante 😉

I find the mentioning of multiple levers with regards to inflationary pressures, and the financial cycle being popped in later in the paragraph, to be a slightly contentious area.  But not to worry.

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  • Miguel Sanchez

    The ‘in hindsight’ defence is far less convincing when you consider the sentence that follows:

    “Concern over the appreciating exchange rate also acted to constrain the Reserve Bank in its ability to respond to pressure emanating from housing.”

    There was never any point in that cycle where the exchange rate was expected to lead to (1) an undershoot of the inflation target, (2) a downturn in activity, or (3) any market disruption or other financial stability concerns. So it’s hard to imagine what that ‘constraint’ was, other than a personal/politically motivated view that the exchange rate should be lower. You’re right that a string a bad forecasts doesn’t automatically imply policy failure, but I think it was pretty clear even at the time that the Reserve Bank was consciously stepping outside the bounds of its price stability mandate.

    • Interesting stuff – I didn’t pay any attention to the RBNZ until 2007, so have just worked with their description of events. Along with that 90 day bill and CPI forecast comparison paper that came out that showed that the RBNZ was the most “bullish” on both those fronts.

      However, the high level of non-tradable inflation feeds right into your narrative.