Matt Nolan

Green’s Investment Bank

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The Green party has announced a “Green Investment Bank” to help facilitate investment in green industries (release, discussion, paper).

I am not against it per se, and given they are saying that in the first year they will have a working group to determine the details there isn’t too much I can dig my teeth into here.  As a matter of principle I am:

  1. Against industrial subsides
  2. For policies that help to improve matching and adjustment to changing economic reality

This policy is doing a bit of both, so I would need details before I can say much.  But the money quote for me from the policy document is this: Read more

Matt Nolan

Labour’s alternative budget

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I suppose that this was Labour’s alternative budget.  They’ve taken the policy documents they’ve put together recently and stuck them together in a blog post.  Fair enough, it is a good idea to put together policy documents so why not – I really like the idea of detailed policy documents by the opposition as well, so good work on that!

As a result, I don’t have much to say about it (the monetary policy has been discussed here and here – I should look into the others at some point and do posts), I summed up my view on Twitter:

However, there is one bit that gets on my wick a bit, it did for the ACT release as well – this rubbish about targeting an “unemployment rate”.   Read more

Kirdan

Monetary policy 2.0?

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Labour wants to upgrade monetary policy, preserving inflation targeting but asking the Reserve Bank to reduce persistent external deficits. To help, the Reserve Bank might get to vary contributions to an enhanced Kiwisaver scheme and go a little further with macro-prudential policy. Getting kiwis to save more is probably a good thing. If successful, interest rates would be lower and ease the exchange rate a little. But the evidence-base is weak and there are many leaks since implementation and accountability frameworks are not clear. Better to leave the Reserve Bank to do what they do best – implementing flexible inflation targeting.

The problem as defined

Many commentators point out that New Zealand has high real interest rates and that the exchange rate is overvalued relative to an economy less reliant on borrowing from abroad (see below). That makes our exports less competitive and promotes consumption of imported goods over domestically manufactured goods.

The problem: high interest rates and an overvalued exchange rate

The problem: high interest rates and an overvalued exchange rate

 

Our persistent negative external balance – that nets our borrowing and imports from overseas against exports – largely reflects our savings choices. Of course, an external balance can also reflect imports of capital equipment for investment in the real economy but most likely reducing the external balance would reflect a useful rebalancing of economic conditions for New Zealand.
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Matt Nolan

ACT’s alternative budget

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As of now I’ve only seen one alternative budget come out prior to Thursday’s Budget – the ACT party’s one (Stuff,NBR).  Good on them for releasing an alternative budget, I like to see that sort of thing.

However, I have to admit I was a little more than ‘very disappointed’ with the quality of the content.  If your view of the ACT party is fragile, I would suggest not reading this post.  Anyway, here we go.

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Matt Nolan

Immigration and monetary policy: Let’s be a bit careful

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Note:  I realise I have been writing about Labour’s policies and not other parties – I have been very busy, and only write about things when I get a chance.  If you want me to write about any specific party policy, email me, and I will try to have a go 🙂

Labour is talking about varying migrant visa approvals in a counter-cyclical fashion, as a way of helping out the RBNZ with monetary policy.  This bears some relations with stated thinking fro some members of the RBNZ [Update: Michael Reddell, the author of the paper, justifiably pointed out in the comments that the Labour type policy is not related to his work – and that my statement was unclear.  He is completely correct – his work and a counter-cyclical visa instrument are about different things, an important point to keep in mind!].  Now this isn’t about the level of migrants coming in – only the timing – so this isn’t a way of us shutting our borders.  I would like to keep the two issues separate in this instance, so we can think about the specific policy more clearly.

Furthermore, the focus here is very much on short term variation with regards to monetary policy – not a long term view of high interest rates and the real exchange rate.  This issue is much more contentious IMO, and deserves separate discussion.

Much younger (but far less charming) me, at the start of the blog, noted how inward migration boosts “demand” and “supply” in a monetary policy sense, so we need to consider our arguments carefully!  So the idea is that, when migrants first appear they have to set up in NZ and may not get integrated into the workforce straight away.  As a result, the first thing they do is “increase demand”.  The demand for housing, for building housing, for buying other non-tradable services pushes up the interest rate (although we also have to ask how they are getting the income to provide this demand – is it that they are bringing a capital inflow with them and this is the driver?).

As a result, lowering visa quotas when the economy is running hot and lifting visa quotas when the economy is cold could help to limit variability in interest rates right?  Well, not so fast:

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Matt Nolan

Labour and monetary policy

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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.