Roskam on RBNZ's Shock and Awe

John Roskam over at the Australian Financial Review:

While Lowe hasn’t ruled out “extreme unconventional policy measures” at least he hasn’t yet embraced them as his counterpart across the Tasman Sea appears to have. Last week the Reserve Bank of New Zealand cut interest rates by 50 basis points to a record low of 1.0 per cent in a move described as “Shock and awe Kiwi style”. The decision prompted the production of a research paper from New Zealand’s leading think thank, the New Zealand Initiative, entitled The Unreserved Bank of New Zealand – Why unorthodox monetary policy needs boundaries. While there are differences between the responsibilities of the two countries’ central banks, nearly everything the paper says about the Reserve Bank of New Zealand applies to Australia. It should be compulsory reading, not just for every member of Parliament, but also for all nine members of the Reserve Bank Board.

A key argument of the paper is that such policy could result in the Reserve Bank of New Zealand undertaking essentially political functions.

“Under quantitative easing, the RBNZ could become an alternative to Inland Revenue [ATO] and the Treasury as it would provide (indirect) funding to the government by purchasing government bonds. If it went beyond that and started purchasing corporate assets, it could also morph into something resembling a sovereign wealth fund. If it chose to fund projects of a certain nature (say bonds with an infrastructure background or related to specific policy areas), it would again be more akin to Treasury.”

Lowe’s remark that in the face of persistently weak economic and wages growth, “We [the RBA] would need to look at all monetary options, fiscal options and structural options”, has passed with barely a murmur. Maybe it’s because in Australia we think that producing helicopter money or implementing quantitative easing is what other countries do.