Hi Seamus,

Was going to write something up on exchange rate models and macroeconomic imbalances but this analytical note from the RB fits the bill: http://www.rbnz.govt.nz/research_and_publications/analytical_notes/2012/an2012_08.pdf

Worth noting their up-front assumption that the exchange rate is overvalued relative to either a pre-specified current account (like the Pederson Institute who assume the long-run current account position is three percent, well, negative three percent, for New Zealand), a long-run current account position based on an estimated cross-country regresssion based on demographics and trend growth, or an assumption about the NIIP position – which seems like an assumption on the CA to me.

Bottom line: this framework assumes the exchange rate is overvalued relative to a world where New Zealanders save more. One can easily get pretty cynical then about this kind of analysis – particularly given New Zealands track record with essentially no debt defaults

If the aim of this policy is to raise the
aggregate savings rate, then I doubt that this policy will work. The bulk of
saving is done by households who are not borrowing constrained and who can
therefore easily off set any increase in kiwisaver rates by dissaving elsewhere
– leaving total savings largely unchanged.

If the policy maker wants to increase the
savings rate, they should take a good look at the tax treatment of savings.
Where are the tax free ISAs (individual savings accounts popular in the UK) in
New Zealand? My guess is that savings are not low because households are
impatient, but because saving is penalized in the tax system.

The proposal to turn the kiwisaver
contribution rate into a monetary policy tool is truly bizarre and only
marginally less baffling than the a proposal once floated by a Treasury
official to use GST rates to target the exchange rate. If, as I argued before,
households can offset increases in kiwisaver rates through dissaving elsewhere,
then this is going to be a pretty useless policy tool. Worse still, it will be
borrowing constrained households (those with poor credit ratings or those who
have already borrowed up to the limit) who will have to do the ‘heavy lifting’
for this policy tool to work. Let’s not even get into the relative effects on
different age cohorts.

How and why this would affect the real
interest rate or the exchange rate, is anything but clear.

How can a positive productivity shock slow the economy down?

If compulsory savings is a negative productivity shock, then it might slow the economy down.

Kirdan. First of all, I should have added “welcome to the NZ econ blogsphere” in my previous comment. I’m afraid that “macroeconomic imbalances” is a bit of a reach-for-my-revolver expression for me, so I couldn’t resist doing a follow-up post on Offsetting, http://offsettingbehaviour.blogspot.co.nz/2014/05/welcome-kirdan.html. I hope you have time for a follow-up post.

On balance I have enough sympathy with macroeconomic balance models – which show lower real interest rates and exchange rates from a better savings-investment balance – to favour promoting savings a bit more.

I used the phrase “probably pushes in the right direction” since most microeconomic studies suggest sufficient savings while the macro evidence suggests New Zealanders have a way to go.

Both the micro studies and the macro data are pretty fraught though. The revisions to GDP and the savings track in the UK show just how fragile the conclusions economists draw in this space can be.

The Treasury, the Reserve Bank and the IMF all suggest the exchange rate is 5-15 percent “overvalued” and point to savings being an issue. So some savings imbalance seems a reasonable problem definition for the Labour Party to start from.

I don’t see GDP as the discounted sum of current and future consumption.