Thursday 13 May 2010

Phil Goff on Monetary Poicy

It seems that Phil Goff feels sorry for those people who voted National only to see the Nats pretty much follow the same policies, and so is coming up with policy proposals to make those people feel better about their vote. I was particularly struck with this one:

Mr Goff said yesterday that Labour would give the Reserve Bank new powers to regulate the economy, suggesting the present focus on inflation will be expanded to include the stability of the dollar, full employment and economic growth.

For argument’s sake, let’s pretend that this is a serious policy proposal and think about what it means and how it would be implemented. First of all, what are these “new powers” that could be given to the Reserve Bank. At the moment, the Bank has the ability to set interest rates for borrowing and lending between it and financial institutions, the ability to buy and sell securities in the open market, and some capacity to regulate the financial sector. What “new powers” could the Bank be given that could have an impact on employment and growth: the ability to set taxes; responsibility for the minimum wage; education policies? If there are such powers that are within the ability of the government to give to the Reserve Bank what is the constitutional argument for giving these to the Bank rather than retaining them to exercised by the government and subject to parliamentary scrutiny?

Second, how would the Reserve Bank’s new focus be written? The academic literature on optimal monetary policy often imagines that central banks are, in fact, concerned with more than just maintaining low and stable inflation, and so postulate a quadratic loss function in which the monetary authority seeks to minimise a weighted sum of squared deviations of inflation from target, output from trend, etc. Are we seriously going to start writing quadratic loss functions into the Reserve Bank Act, with parliamentary debate on the exact weight to put on to each term in the function?

Now, I fully realise that Goff's speech is just political grandstanding rather than a serious policy position, but the worry is that this sort of announcement could force a future Labour government to make some kind of superficial tweak to the monetary policy environment to create the illusion of change. The likely implementation of Goff’s stated policy would probably be the insertion of some weasel words into the policy targets agreement along the lines that the Reserve Bank is responsible for maintaining an undefined level of stability in an unspecified exchange rate, unemployment at the undefined level considered to be “full”, an unspecified level of economic growth, a win for the All Blacks in the World Cup, and general contributions to world peace.

When it comes to monetary policy and central bank independence, however, even weasel words can have bad consequences. This kind of muddying of the objectives, while not making any difference to currency stability, employment or growth, would effectively remove any accountability from the Reserve Bank for its actions, since any decision could be justified as being based on seeking to improve outcomes for one of the multiple objectives it now has responsibility for.


  1. "Now, I fully realise that Goff's speech is just political grandstanding rather than a serious policy position..."

    Don't you believe it. "Silent T" has been trial ballooning this one over at Red Alert repeatedly over the past few months.

  2. @Seamus: I agree with the bad consequences of weasel words. But what's the incremental harm given that well-neigh anything can and has been interpreted as maintaining inflation within the 1-3% range over an undefined medium term? 2005-06 was a shocker.

  3. You know what - I think that's absolutely fucking excellent - so long as Phil (or anyone) really gives the reserve bank those powers. What does Phil want:

    stability of the dollar, full employment and economic growth.

    easy, easy, easy.
    1. Abandon the NZ dollar for the US dollar: stability

    2. Terminate all benefits especially dole, DPB, sickness, invalids & super. Terminate minimum wage, all union contracts, the ERA, make employment at will on employer's site but any break of contract a criminal offence on the employee's side: result - zero unemployment

    3. economic growth: zero corporate tax and FBT; Cut all civil service salaries by 2/3rds. Privatise all state assets; close down state schools & hospitals & "railway" & "airline" - rapid economic growth

    what is the constitutional argument for giving these to the Bank rather than retaining them to exercised by the government and subject to parliamentary scrutiny?

    The absolute and indisputable FACT that no parliament elected with universal suffrage ever able to make policy decisions that will lead to any of these three outcomes - much less all three!

  4. @Anon: I rather doubt that RBNZ would view any of those three as best means of achieving the stated ends, so giving them the ability to enact regulations to that effect would achieve rather little.

    As a minor point, strong language in the second paragraph of a comment doesn't hit the sidebar comments feed; in the first line, it always does...

  5. It's not so heretical as folks are making out. Or rather, if it is then the heresy is widely spread

  6. @ Pascal's Bookie: The Blancard et al paper you link to is quite different from what Goff was suggesting. They do suggest giving the central bank some additional financial-market regulatory powers, but not to promote full employment, output growth or exchange-rate stability.

    Where I will concede that they are slightly heretical is in suggesting that central banks should formally act to prevent exchange rate instability as a goal that might sometimes trump stable inflation. I think that is a horrible idea, but it least it can be debated. Putting full-employment and economic growth into the mix takes it form the realm of debatable policy into populist nonsense.