Forward guidance and unconventional monetary policy
I recently noticed that swap rates purchases were discussed as an unconventional monetary policy tool are discussed in Reserve Bank’s bulletin “Aspects of implementing unconventional monetary policy in New Zealand”.
Namely, they state:
“Purchasing interest rate swaps could be a way to signal that the Reserve
Bank expects to keep the OCR low for a prolonged period. Swap rates
comprise the expectations of future policy rates, the term risk premium,
and margin for bank credit risk.”
So why would we want to keep OCR persistently low in long-term? Let’s have a closer look at this.
The link between migration and wages is complex and confusing – especially when it is often communicated about in different ways (eg are we talking about wage growth now with regards to monetary policy, wages in specific industries due to the changing make-up of the economy, or long-run real wages?). And I can’t be much help here.
However, I think this is one place where carefully using the macroeconomic model taught in ECON101 can help us to think about the issues a little bit – especially if we are narrowing the question to only “what is the monetary policy consequences of changes in migration flows“. Now this model is wrong, assumptions in it are wrong, the outcomes it describes aren’t forecasts – but it clearly articulates tendencies we observe following a change in economic circumstances which will hold in more realistic models, and clarifies assumptions that may make these tendencies false. We have pointed at this before for monetary policy – but lets outline a bit more now.
It is a model for thinking about the potential consequences of something in a critical way – not something that we accept uncritically as truth. To me this is pretty damned useful as a way to start thinking about something, so let’s do it!
While I have been MIA over the last four years a lot has changed on the internet and in terms of economic and social discourse. The weird infatuation of the alt-right with “globalists” and nonsensical economic arguments is particularly upsetting – and I’ll be discussing how the decline in persuasiveness of economists has helped these types of people fill the void in the future.
My concern four years ago was that the non-rationalist identity politics of the left would open this type of negative nationalistic politics on the right – or would at least be used as a foil for it. The refusal to actually state our assumptions and values is a failure irrespective of the intentions we hold. In that way, when exploring Youtube I’ve been pleasantly surprised by the leftist video blogs – and their willingness to fully articulate their views. Key examples of this are Shaun, Contrapoints, and Philosophy Tube.
However, these channels are distinctly “anti-capitalist” in terms of wanting sizable change in the status quo. I am a mainstream economist that believes in incremental change. A full discussion of this would be interesting – but give me time. But to do so we need to get something clear about the labour theory of value that I am hearing them describe – it doesn’t make sense as a justification for anything let alone as a “theory of value”.
Note: The actual labour theory of value has been defined many ways – and the most profitable Marxian interpretation I’ve seen is trying to understand LTV as part of a subsistance wage argument on factor income shares. That isn’t the focus here.
I have spent most of the last four years trapped in a small space, pouring over legislation and microdata to figure out details of the New Zealand tax-transfer system prior to 2014 – with short breaks to deliver some lectures at Victoria University. I learnt a lot, but I had no chance to keep up with the New Zealand economy.
So now I’m back, and I have questions. This is what I bring up in my Top 10 over at interest.co.nz that went up this weekend.
So what are the key issues I’m struggling with:
- Why is the participation rate so high – this helps to describe it, but why? [Related facts: It has been full time work climbing, with increasing participation by those over 65 AND rising female participation]
- Why has the NIIP liability position improved to the degree it has – this helps to describe it, but why?
- How are we seeing “late cycle” without input price pressures? [Note: The RBNZ does not see this as late-cycle judging by this]
- The OCR looks low for “late cycle” – what is this due to? I’m going to split this in two: What part is due to real economy issues, and what part is due to changes in bank regulation/macroprudential policy?
Related questions – which are likely answered by the answers to the questions above are:
- Why is labour productivity so low?
- Why is the part-time employment as a percentage of employment so low?
- Why are house prices so high?
- Why is there no product price pressure – especially non-tradable prices? This describes some – but why are non-tradables doing this now?
- Why is the terms of trade rising to the degree it is?
As you can tell reading this, I genuinely don’t know anything … but as someone who has a pretty clear view on macroeconomics and a good grasp on the NZ data and data history prior to 2014, I haven’t found any accessible answers to these questions easily. So I am hoping you can help me here 😀