Labour and monetary policy

Labour has put a bunch of thought into its discussion on monetary policy – and there is certainly nothing wrong with discussing the issues and putting out a policy document, in fact there is a lot right with that.  Furthermore, over their entire document they recognise this is a multi-faceted issue we need to be careful with, I appreciate that a lot.

However, there are still a few glaring issues with the way they discuss monetary policy:

  1. They keep mixing “monetary” policy with longer-term “fiscal” policy.  It is not the RBNZ’s role to determine longer-term fiscal policy – this is undemocratic.
  2. On that note – the “external balance” is not an RBNZ target, and nothing they are suggesting actually helps that.  This is a general issue with medium-long term savings-investment imbalances, and we need to neatly define what the welfare relevant “problem” is before we go swinging around policy and reducing the ability to “judge” the Bank by giving it piles of targets.
  3. They don’t seem to appreciate how much monetary policy HAS changed during the last 25 years as institutions try to adapt to the changing world around us – their view that policy structures are no different than they were in 1989 is totally wrong.
  4. The variable Kiwisaver idea, controlled by the RBNZ, is horrible.  It comes from a good place IMO – they are looking for counter-cyclical tools that are used by an independent body.  But as I’ve explained, this is a particularly bad one, and will hurt the defacto independence of the RBNZ.  In addition, this “tool” won’t help the “external balance” – as the average savings rate should be unchanged.

Labour’s focus appears to be on exporters and manufacturers, as given there discussions with people they believe there is an issue there.  However, monetary policy, and the monetary policy choices of the Reserve Bank, are not the cause of this inherent S-I imbalance which forces NZ interest rates to be on average high.  Investigating why this is, and trying to understand it and base policy on issues in that, is the way forward.  This is why we’ve had a savings working group, a tax working group, and a productivity symposium – as all these structural issues, and the trade-offs they represent, are related.

These whys matter intensely for deciding policy – wasting time trying to mess around with one of the institutions that is working (in terms of keeping inflation in the band, and moderating the drop in output/employment, during the largest external shock since the Great Depression) to look like we are facing the issue is not doing this.

16 replies
  1. john small
    john small says:

    re #2, aren’t they proposing to broaden the RBNZ’s objective function?

    That looks sensible to me. At present, we are not asking the RBNZ to assess trade-offs between monetary policy & the real economy. Isn’t that just too easy a job?

    • Matt Nolan
      Matt Nolan says:

      They are proposing that, when implementing monetary policy, we use a broader objective function. Yes. However, I would not call this sensible – it is a poor idea.

      Remember that the RBNZ is not democratically elected, and is given external power solely its agreement with the government. As a result, the government decides the size and scope of what the Bank should cover AND what constitutes monetary policy.

      This leaves us with a “double” issue with regards to what we should put in the PTA – firstly, what pwer should the government give to an external institution? Labour may justifiably think that other economic issues should be given to external bodies as governments are “time inconsistent”, in that way we can establish institutions that do that. This is cool.

      However, monetary policy in the way it is performed should be a clear target with a mandate that the independent body can be held responsible for – in order to get the incentive for the independent authority to make choices, they need to be held accountable. Even if we thought the monetary policy choice was a simple one, the need for accountability is important – in fact we could argue that accountability is currently too low!

      If we are interested in issues to do with the external balance, and the rate of interest rates the Bank is FORCED to set in order to meet monetary policy aims (remember that Bank doesn’t really choose interest rates – it is simply trying to control AD in order to reach a “flexible” inflation target), then we need to look into those issues. In what way could an independent body help this? What has the advice of the three working groups told us about “why” we face CA deficits and high interest rates?

      And here we reach an interesting issue – these choices we have made have “equity-efficiency” trade-offs embedded in them, and are often not the result of time inconsistency. As a result, we need central government, with its democratic mandate, to determine what choice in terms of equity and efficiency we make. Is the current tax system “fair”, is the nature of spending “fair” – both in terms of their impact on distribution and the level of income.

      We can’t just lay these points off to the RBNZ, or to broad technocrats. We need to embody them in an understanding of the NZ economy, and then allow the democratic process determine what NZer’s want.

      Broadening the objective function of the RBNZ with respect to monetary policy doesn’t only reduce accountability and the efficacy of monetary policy, it undermines an element of democracy – I’m positive this is not Labour’s aim at all, but this does not stop it being the case.

      I suspect part of this has to do with the “mystical” properties the RBNZ seems to have been given – in truth their job should be “too easy”, as they are an independent, non-elected, institution that needs to be tied down by a strong contract with a democratically elected government.

      • john small
        john small says:

        Thanks for this Matt.

        I share your concerns about shuffling big issues off to technocrats, but we’re doing that anyway, and there are some very obvious biases and inefficiencies in the current set-up as David Parker has outlined.

        At this point I’m quite puzzled about whether you consider there is actually *any* problem with the current framework, even if you don’t fully agree with Parker’s characterisation. Its easy to discuss trade-offs, but much harder to decide whether you actually support the status quo or want to explore alternatives.

        • Matt Nolan
          Matt Nolan says:

          I wouldn’t say it is easy to discuss trade-offs – it is certainly necessary though.

          With regards to frameworks, I’m generally in favour of what we have – but would like to leave my mind open to be persuaded on elements of it, if things need to be changed. I’m an incrementalist at heart.

          More broadly, I think that shifting things to technocrats needs to be done in a transparent and accountable manner – the accountability of the RBNZ is one issue where I might consider changing the current framework. However, this opens a whole can of worms – is there a trade-off between accountability and transparency, between accountability and the ability to commit wrt time inconsistency etc etc.

          These are all good conversations for us to have, and I just want to avoid being too “dogmatic”, hence why my discussions on these things tend to be fairly open.

  2. JC
    JC says:

    I don’t see that the exporters need a hand with a lower exchange rate. From where I sit mine and other exporting industries are doing very well regardless of the exchange rate. Giving us more money for our resources increases our profits without necessarily changing the way we invest.

    I can’t help but feel that our customers will do what they always have.. if our exchange rate gives us too much they tend to negotiate lower prices for the next quarter or, as if by magic our exchange rate increases!


    • Matt Nolan
      Matt Nolan says:

      It is all a hard issue – before we can say anything, we need to figure out why the exchange rate may be “wrong” as a price. Given the rapid nature of technological change these things are tough to conceptualise let alone measure!

        • Matt Nolan
          Matt Nolan says:

          I prefer not to use terms like over/under valued – I prefer to ask “what is this asset/relative price suggesting and why”. Looking at policy problems solely through an intermediate, like the exchange rate, productivity, or inequality, muddies the water – it motivates investigation, but it doesn’t tell us what we “should” do.

          • john small
            john small says:

            sure, but there is no point/reason in asking why &/or and what we should we do unless you admit there is a problem in the first place.

            So maybe I’ll ask a different way. Even given that the exchange rate is just a symptom, do you think NZ’s exchange rate is a symptom we should like, or not like?

            • Matt Nolan
              Matt Nolan says:

              Social choice is hard what can I say – and I genuinely don’t think I can say as an economist that something is a problem or not. Instead, if people in society are complaining about something that has a representation in the data (the difficulty of exporting, combined with a situation where we have persistent CA deficits) it deserves investigation.

              When we investigate, we can work out what the problem is, and what the policy solution is. These things are not transparent ex-ante. Now, these issues did get investigation with the three “working groups” – so perhaps that is the line of thinking we should be considering for policy.

              And more fundamentally, this is a document on monetary policy, but monetary policy isn’t the cause of the high interest rates or historically high dollar. Monetary policy is responding to fundamentals, not creating them.

  3. Blair
    Blair says:

    It is fascinating as to why they want to lay this off to the RBNZ. It it themselves they distrust, or the Nats, or Labour’s future coalition partners?

    Note that the policy is simply to “ask the Reserve Bank and Treasury to assess in detail the new tool”. I can’t see it getting up. Surely it’s a matter for the Finance Minister.

    • Matt Nolan
      Matt Nolan says:

      I guess it may just be a marketing thing – Labour is trying to show they will consider new things, and check them on their merit. That is sensible, and as far as marketing goes I am all for that.

      I do fear that politicians “blame” the RBNZ for things, when actually they are the costs of policies that the politicians have put into place (Note: The policies would have had benefits also, but the politicians already claim them 😉 ).

  4. Elinor_Dashwood
    Elinor_Dashwood says:

    Sorry to be a rubbish macroeconomist, but here’s a question. Is a macroeconomic situation in which the Bnk would be getting worried about inflationary pressures, likely also to be a situation in which it’s a good time to be putting more into long-term investments?

    What I am wondering is whether compulsion (which I abhor) is necessary and integral to the approach, or whether this variable saving rate could somehow be made so attractive to KiwiSaver members that a reasonable number of people would be willing to stay (or come) in on that basis anyway.

    • Matt Nolan
      Matt Nolan says:

      I think, if we are considering it in terms of monetary policy, the key question is whether a time of strong growth/elevated concerns about inflationary pressure is a time where households are likely to find it harder to borrow – when it is likely to be the opposite.

      If there are other policy goals here, such as having automatic adjustments based on a growth rate such that it is seen as an “automatic” stabiliser then sure, Treasury can have a peak into that and think about it in a more general welfarist sense.

      In terms of making the scheme “attractive” in some way – we are moving to a fiscal transfer, which is a separate argument again IMO.

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