Friday 25 November 2022

Inflation accountability

Susan Edmunds at Stuff asked me whether the RBNZ is to blame for current inflation outcomes. 

She only had room for a shorter snip, so here's the full bit I'd sent through:

Economists say that the central bank moves last. That means, whatever else is going on that might affect inflation rates, the central bank gets to take it into account when deciding on monetary policy. So if a government runs imprudent deficits when the economy is overheated, an inflation-targeting central bank’s job is to undo the effect of that spending by increasing interest rates by more than it otherwise would have. Surprises can happen. But if a central bank is credible and everyone knows that the central bank will do what it takes to get inflation back within bounds, then that surprise does not much affect either inflation expectations or inflation. When credibility is eroded, everything becomes harder and more costly. 

So while many things contributed to the current inflation rate, including initial large and sustained monetary stimulus, Covid shocks, substantial and highly inappropriate fiscal stimulus, and war in Europe, inflation outcomes are the responsibility of the central bank and monetary policy. Remember as well that New Zealand has a floating exchange rate which provides a buffer between local inflation and international prices. If other countries run very loose monetary policy and New Zealand does not, the New Zealand dollar appreciates and international inflation does less to affect local prices in New Zealand dollars.

But it has not helped that the Remit of the Reserve Bank, which is the agreement between the Bank and the Minister of Finance about the objectives that the Bank will seek, has weakened considerably. When inflation targeting is only one of several parts of a Remit that also includes multiple references to other government policy objectives, it is easier for a central bank to stray from its core business in pursuit of other interests. And when the Reserve Bank and the Minister of Finance consider it a conflict of interest for academic economists with a specialist research interest in macroeconomics and monetary economics to serve as external members of the Monetary Policy Committee, external voices with expertise to break a misguided internal consensus are shut out. Responsibility for those lies jointly between the Reserve Bank and the Minister of Finance. And responsibility for the reappointment of a Governor who presided over these issues lies with the Minister of Finance and the Reserve Bank’s Board

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