Narrative, communication, and monetary policy

In a recent article on I chatted about monetary policy in New Zealand. As we’ve noted in the past, measures of price growth are pretty elevated in New Zealand – however, I make the case that RBNZ actions have been relatively appropriate (given uncertainty and the size and nature of the supply/income shock) but that it is their communication that lets the team down.

The comments below the article fundamentally think I’m misguided – and that the Bank has dropped the ball more fully. Blanchard also has an excellent post on the US case which may be also be used to be more critical of the policy operation of the RBNZ.

Although I am constantly misguided and wrong, there are two things I would raise here to defend my own position:

  1. With external shocks there was always going to be an “income loss” – fiscal and monetary policy determine how this is distributed. The Bank can’t make this type of “cost of living” crisis and related loss go away – it can only ensure that the transition back to their clearly communicated inflation target is “least cost”.
  2. Criticising communication is a big critique of the RBNZ – managing inflation expectations is their core job.

There is no point bagging an institution for things that are not their fault – but more transparent and clear communication about monetary policy, instead of every other issue that the Bank seems obsessed with at the moment, is needed. The current lack of communication about narrative/forward looking guidance about how the mandate will be achieved, combined with forecasts that arguably point to a general failure of the mandate, is a problem. If this type of failure doesn’t lead to changes in how monetary policy is communicated in the current environment, or lead to a situation where the responsible people at the RBNZ face consequences for this failure, then inflation expectations are going to become unanchored.

And I would argue that the nature of the comments on my article indicate that people’s faith in the RBNZ to manage inflation expectations is frayed – and their reaction reinforces the importance of the very communication issue I am pointing to!

If you feel compelled to attack the Bank further or launch into an impassioned defence, then go for it in the comments. I just want good policy communication and evidence-based policy that supports the wellbeing of New Zealanders – something that both the Bank and private sector commentators have a responsibility to up their game on, given the quality of the current discussion of New Zealand’s “cost of living crisis”. (Noting that a number of NZ economists – as shown in the comments of this piece – are trying to clarify what is going on)

Fiscal policy itself matters here, and clearly understanding the trade-offs associated with fiscal policy choices – at a minimum through the necessary monetary policy offset, but also through the distributional implications and consequences on growth and productivity – is another important area for discussion. Let’s leave this for another time though.

Excise taxes and policy incoherence in New Zealand

Ok, I’m coming permanently out of “proper blogging” retirement. Why?

The New Zealand government has decided to cut fuel taxes and RUC due to the “cost of living crisis” in New Zealand – egged on by the opposition and a range of New Zealand thinktanks and “thought leaders”. When a similar spike occurred in 2008 such a suggestion would have been ridiculed for being the ill thought out and incoherent policy it is – now it is the sort of stuff that gets a cross-party consensus and loud repeated cheers from the tens of New Zealand Twitterazzi.

Honestly, what is wrong with policy debate in New Zealand – when did we go from caring about policy outcomes and trade-offs to treating every policy decision as something that must be done urgently as if we are in the middle of an episode of West Wing. I mean, read the analysis in the two front-page articles on Stuff (here and here) – it is all politics and no consideration of trade-offs.

Want to understand why I see things this way – click the tab and read on.

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What is happening with NZ inflation

Walking down the street everyone is abuzz with the recent CPI numbers. 5.9% inflation! Someone’s failed! Economists are wrong for some reason! Freeze prices! Slash things! Destroy capitalists! Suppress workers! Random noises!

I’ve heard it all.

However, it made me realise something. I haven’t looked at the details of the CPI numbers for years. If the situation has changed then my inattention to these numbers may lead to me making silly decisions. Furthermore, other people’s attention to these numbers may make inflation more responsive to the CPI releases – meaning that there is more value in me paying attention.

Given all of this, and given that I wanted to reacquaint myself with the new version of the Stats NZ website, I’ve put together an excessively long video exploring the CPI data at the “product class” level. In it I also have a look at some price stickiness measures, looks at some other inflation numbers, and fail to put particularly nice labels on scatterplots – this can be found here.

If you prefer 4 minute summary videos instead, then I run through the key ideas in 3 graphs here. And if you prefer to get your own hands dirty with the data, rather than listening to me drone one, jump over here to use my R code and access Stats NZ’s data.

Do I reach any exciting policy conclusions, or give a forecast of where we are going in any of this – no. Did I have fun, and feel like I have a better understanding of the type of shock New Zealand is experiencing at the moment – yes.

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Why higher haircut prices might point to a strong economy (transcript and video)

Seeing the price of haircuts rise, even relative to other things I might spend my money on, is the sort of thing to make an economist rail about anti-competitive behaviour. But is that really the case, or are higher haircut prices just a sign of a strengthening New Zealand economy? Gulnara and I have a think about this in a recent video.

For those who don’t like videos, there is a transcript below.

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NZ GDP at record highs?

It has been a long time since I’ve closely followed New Zealand macroeconomic statistics – but I was a bit surprised seeing the headline “GDP jump of 14 per cent completes NZ’s ‘V’-shaped recovery“.

Cliffs notes to this post – it was a strong result, but September likely wasn’t the strongest quarter on record, and real economic activity is still probably down a little bit. You gotta be careful with seasonal adjustment during “shock and turning points” – and Stats NZ did actually even tell us this in their release!

Update: As Economissive notes I can’t read and this was up on a year ago – good shout this was a dumb thing to miss. Dang that is a strong GDP result!

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COVID-19 is a watershed moment for government involvement in the economy

The RBNZ released a report estimating the economic impact of COVID-19 containment measures back in May. They estimate that one week of alert level four (L4) costs the economy about $2.2 billion in GDP. Stats NZ recently registered a 12.2% fall in GDP for the June quarter. Sobering stuff.  These are big, scary numbers. Scarier still for those in tourism or hospitality who are wearing a disproportionate amount of that cost. Clearly there is substantial economic suffering, but how can we think about government responses?

About the author: Byte Size Story connects everyday economic issues with the big picture. The views expressed here are the authors. If you have any questions about the post please email

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