Gulnara Nolan

Liquidity traps and unconventional monetary policy

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With all this talk about a zero lower bound and unconventional monetary policy I was keen to refresh myself on “liquidity traps” – as I remember people chatting away about these when I was at university.  So what is a liquidity trap, how does it refer to what is going on now, and how can I think about monetary policy when we are in that situation?

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Gulnara Nolan

Forward guidance and unconventional monetary policy in NZ?

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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.

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Matt Nolan

Communication and monetary policy

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I was sitting around eating a date scone the other day when I ran into this article by Shamubeel Eaqub.  The topic was central bank communication and whether the RBNZ (New Zealand’s central bank) was doing things well.  Within a number of hours I’d been sent the link numerous times and had received a pile of feedback – with people on all sides fairly angry.  This is an important issue though, so I thought I would note down my own thoughts while they are in my head.

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jamesz

Re-opening the NGDP targeting argument

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Did you follow the NGDP targeting debate with interest but bemoan the lack of theoretical arguments? Then you’ll love the latest iteration of the debate, in which ex-Bank of England macroeconomist, Tony Yates, takes on Oxford’s Simon Wren-Lewis.

Tony’s initial swings at NGDP targeting focus on the sub-optimality of weighting inflation and output equally:

I don’t see that following a levels target of any variety, NGDP or otherwise, is an alternative to raising the long run average inflation rate, however implemented.  There’s no choice but to bite the bullet and figure out a different trade-off, between the costs of long run higher inflation, and the costs of higher volatility imposed by missing stimulus at the zero bound.

Simon is more positive about NGDP targets and garners another reply from Tony. The whole exchange is well worth reading for anyone with an interest in monetary policy.

jamesz

QOTD: “”I have a dream. It involves a Star Trek chair and a bank of monitors.”

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Bank of England Chief Economist Andy Haldane:

“I have a dream. It involves a Star Trek chair and a bank of monitors. It would involve tracking the global flow of funds in close to real time, in much the same way as happens with global weather systems.”

Is the binding constraint on better macroprudential policy a lack of timely information? If they had that information, could a world regulator really have averted the crisis in 2007?

Full speech here.

Matt Nolan

On participation and wages

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Last week the Reserve Bank released their official cash rate review.  As always, it was a good review laying out the important trends that are influencing their thinking when it comes to setting the official cash rate.

However, there is no fun in leaving it there.  There is one part of the statement I want to be pedantic about:

Wage inflation is subdued, reflecting recent low inflation outcomes, increased labour force participation, and strong net immigration.

There are two parts I want to discuss here:

  1. Increased labour force participation:  The Bank is essentially saying that wage inflation is subdued, relative to what we would expect given the increase in employment, due to the fact that labour force participation rose.  They are right, totally and completely – labour demand shifted right, and the supply curve was such that most of the change came in quantity not price, neat!  However, this can give a misleading impression of the future if we don’t read it carefully – let us not forget that labour force participation rates are at a record high at the moment.  As a result, the “capacity” in the economy is more limited – and future lifts in labour demand are likely to lead to nominal wage pressures (note this isn’t the same as higher real wages per se – but more like an increase in inflation expectations) than lifts in employment.  This is indeed what the Bank was hinting at with the statement prior “Inflation remains moderate, but strong growth in output has been absorbing spare capacity. This is expected to add to non-tradables inflation.”
  2. Strong net migration:  Hold on a second.  We keep being told that strong net migration is pushing up inflationary pressures.  Now we are being told that net migration reduced inflationary pressures (note that “wage inflation”, again not real wage growth, is a lot closer to real inflation, and real inflation expectations, than a point in times annual increase in the CPI).  Higher population growth does indeed increase “demand” and “supply” so the relevance to monetary policy itself is indeterminate.