Friday, 16 October 2015

Monetary policy needs mates?

Here's Brian Fallow at the Herald.
The European Central Bank and Bank of Japan are printing money, and while the US Federal Reserve has at least stopped doing that, it is apparently in no rush even to start lifting interest rates from the emergency levels it cut them to during the crisis. Such heavy dosages of monetary stimulus carry serious side effects. They have inflated asset markets around the world, including the Auckland housing market.

The IMF warns that "The main medium-term risk for advanced economies is a further decline of already-low growth into near stagnation, particularly if global demand falters further as prospects weaken for emerging market and developing economies."

Countries (such as New Zealand) which are not fiscally constrained and which significantly rely on net external demand should ease their fiscal stance in the near term, especially through increased infrastructure investment, it says.

Fiscal conditions in New Zealand are likely to become more stimulatory regardless of any policy change, simply because of the "automatic stabilisers" as unemployment rises and revenue growth slows.

But the IMF is right to call for more than that.

It is a bit too easy for the Government to leave the task of moderating the cycle entirely to the Reserve Bank.

That task, never easy, is especially difficult in the current international environment, governor Graeme Wheeler said in a speech on Wednesday.

As the saying goes, monetary policy needs mates.
Fallow's article could make sense if, say, NZ monetary policy were already near the zero bound and they'd not figured out how to run less conventional moves. But to the extent that monetary policy needs mates in New Zealand, it needs help in keeping Auckland house prices from spiralling ever upwards. It doesn't need help in any fiscal demand pushes. Fortunately, Chris Parker over at Auckland Council seems to be making some headway.*

With inflation having been below the bottom of the policy targets agreement bound for a heck of a long time, and interest rates nowhere near the zero bound, it isn't right to say that monetary policy needs mates in preventing unemployment. It's closer to right to say that monetary policy's barely been tried.

Mike Reddell raises a few pertinent points here. 

* Here's the nice part on Auckland:
Item 13: Housing Supply, Choice and Affordability: Trends, Economic Drivers and Possible Policy Interventions
Chris Parker, Chief Economist for Auckland Council, spoke to the committee on his recently completed report Housing supply, choice and affordability; Trends, economic drivers, and possible policy interventions, which was publicly released on Wednesday 30 September 2015.
The report identifies a range of levers on both the supply and demand side that could be considered to address the housing affordability problem in Auckland.
Following a recommendation in the report, the committee decided to endorse a target of bringing down the ratio of median home purchase price-to-median household income to five to one by 2030. The ratio is currently nine-to-one. [emphasis added]
It also agreed in principle to include the target in the forthcoming refresh of the Auckland Plan and noted that the council needs to continue to work in partnership with the Government if this housing affordability target is to be met.
Mr Parker says including this target in the Auckland Plan is a really positive step towards making housing more affordable. “It will help shape and focus our thinking moving forward. It will provide us with a tangible, achievable goal to frame up the decisions the council needs to make to create the world's most liveable city including affordable housing", says Mr Parker.
The committee also requested that the council progress the next stage of the Auckland’s housing affordability work by undertaking further analysis and advice on the issue of housing affordability in consultation with Government agencies, to be completed in February 2016.
The Chief Economist’s housing affordability report was commissioned by Mayor Len Brown and Deputy Mayor Penny Hulse. It is an independent economic think piece and is not council policy. However, it will help inform the council's ongoing strategy for action and advocacy. It is availableon council’s website.
Kudos to Chris!

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