Thursday 15 August 2019

Preparing for the monetary rocky horror

Over at Newsroom (ungated), I discuss the importance of RBNZ being very clear about its intentions should it find itself in a position to pursue unorthodox monetary policy.
As Doctor Frankenfurter prepared to step up the reactor power input three more points and bring life to the Rocky Horror in the classic Rocky Horror Picture Show, he welcomed the assembled “unconventional conventionists” who would witness his triumph.

Unconventional monetary policy is a bit like Doctor Frankenfurter’s giant defibrillator experiment with the Rocky Horror. It could work, if the circumstances call for it. Preparing for those circumstances can make a lot of sense. But it probably should not be tried except as a last resort. And it seems a bit odd to assemble everyone for a throwing open of all the switches, including fiscal policy, when the projected output gap is positive over the medium-term forecast range.


But it would be rather nice were the Bank to provide a bit more guidance about just what it might do should the world become a bit more unconventional. In his interview with Bernard Hickey, Governor Adrian Orr noted the Bank’s advantage in being able to deploy capital a lot more quickly than traditional fiscal policy.

When restricted to the more conventional of unconventional policies, like ‘helicopter money’ payments to everyone in the country, that is certainly an advantage. When it comes to asset purchases, it would be nice to have a better idea of the sorts of things the Bank might contemplate.

The current remit for the Monetary Policy Committee begins with a preamble noting the Government’s Economic Objective of improving wellbeing and living standards and of moving towards a low carbon economy with a diversified export base.

During conventional times, where medium-term price stability contributes to any reasonable goal the Government might have, that preamble has little effect.

But if the Bank were deciding among assets to purchase, or investments to make, to get fresh cash into the economy through unconventional means, it might be tempted to read a bit more into that preamble and direct its asset-purchasing behaviour accordingly. This would be a substantial and potentially costly error, distorting investment and, worse, politicising an independent central bank. Where the Bank’s consultation document suggests Ministerial consent for RBNZ asset purchases other than government debt, concern about loss of political independence is not assuaged. 

Tell us what's in and out
It is, I hope, unreasonable to think that the Bank might be so-tempted. But where the Bank is taking a more expansionary reading of its remit around climate change, for example, and where the Bank has been a bit happier of late to surprise markets, a few statements noting just what is ruled out in unconventional policy would be welcome.

Preparing for unconventional monetary policy can make sense, even if it is far from the Bank’s current expected path. But we are nowhere near the point at which throwing open the switches on fiscal policy is desirable.

Doing so during these more conventional times should have the Bank instead move to counteract the effects – at least if the output gap were expected to further widen. And clear signals that the Bank has no intentions of waking certain rocky horrors would put a few minds at ease.

We also subsequently released a research note on the topic, joint with Prof Robert MacCulloch at Auckland Uni.

The Newsroom version contains Rocky Horror Picture Show content; the research note doesn't.

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