Experts agree — times are tough
30/01/2013 § 16 Comments
This wasn’t supposed to be a monetary policy week, really. It’s just worked out that way.
Two bits crossed my desk this morning emphasising the tight conditions, possibly too tight.
The NZIER Shadow Board opinion was released this morning. The Board is a group of economists that NZIER has organised to provide peer review of the RBNZ policy decisions. The press release has Kirdan Lees saying:
“On balance, the Shadow Board thinks rates should be held at low levels. Lowering interest rates further has more support than raising interest rates at this point.”
A harsher assessment is in the Dec 2012/Jan 2013 Unlimited. The piece is on-line from 10 December last year, so I’m obviously coming to this late. Donal Curtin recalculates the Monetary Conditions Index to assess monetary conditions. The Index
combines interest rates and the overall value of the Kiwi dollar into a single number, the aim being to measure the combined impact of interest rates and the Kiwi dollar on companies.
Donal concludes that, indeed, the combined monetary conditions are tough. His prescription? Lower the Bank rate. This is pretty standard monetary theory. We can’t do anything about the exchange rate. New Zealand has a floating exchange rate and that’s generally good. But, part of the reason for the demand for our dollar is the slightly higher interest rates here. A lower Bank rate would lead to lower commercial rates, which leads to lower demand for the dollar and a lower exchange rate.
He hedges his bets, of course — hedging is a good strategy in policy advice — but the advice is still there:
There’s no guarantee that cutting interest rates to even lower levels would get the Kiwi dollar lower — but in the current global environment, when even small positive yields on Kiwi dollar deposits are attracting international buying, it’s worth a go.
I don’t think anything much has change since last month.
Groping towards Bethlehem 
Nice catch, hadn’t seen that article!
I wonder how he builds his index, given the fact that during this period market interest rates are significantly lower and the exchange rate is about the same – but he calls the difference in the MCI between 2007 and now low?
He says it is something RBNZ used to calculate (but stopped in 2000?). There must be a methodology published. Alternatively, we could ask him.
Si, asking is good – although I may try to replicate it myself first, then check. This weekend.
Also yes, the MCI was the policy target prior to the OCR – it was dumped following the Asian economic crisis … the feeling is that this was due to policy accidentally being tightened as a result of the choice of instrument.
There you go, some NZ econ history I didn’t know.
That raises the perennial problem: discretion or transparency? If no target is perfect — no target perfectly smooths the economy’s path in way that we can all support — then policy will be some mix of opaque and wrong. If the Bank targets something mechanically, then everyone knows what they will do and sometimes it will be the wrong thing (although, arbitrage). If the Bank exercises discretion, then its policy will be uncertain.
Done – we had an MCI model at work. It has risen, especially in the second half of 2012.
The other three points coming out of the NGDP vs inflation targeting debate: “level” vs “growth” targeting, an argument about whether it is “price” or “income” where certainty about market signals is important for choice, and a discussion of how much “discretion around the rule” a central bank should be allowed (NGDP involves less discretion – and a greater ability to “judge” the appropriateness of CB policy).
The Bank doesn’t think its policy is too tight – it was arguably too tight in 2012 – but it’s current stance is likely to be appropriate for 2013. The question we should ask is whether it was fair, ex-ante, to view their stance heading into 2012 as too tight … something we can’t do. The inability to do this makes the Bank virtually unaccountable … which I think is an issue people are growing uncomfortable with.
You’re right, nothing has changed in the last month – the housing market today is still as hopped up on low interest rates as it was in December. Never mind, I’m sure any decent economist will tell you that goosing it further will have no negative consequences whatsoever.
I’m pretty sure there is a pretty firm consensus not to cut now, and that strongly rising asset prices can be seen as indicative of monetary conditions being “too weak. And yes, using the MCI in this context is a bit strange because we have two clear omitted variables – export commodity prices, and a whole different term structure of interest rates. In that sort of environment I agree with your sentiment.
But I’m pretty sure its irresponsible of analysts to pretend “nothing happened” during 2012, and just act that inflation dropping under the target band and unemployment rising is unconsequential. Analysts actually need to explain why 2013 is so different 😉
“I’m pretty sure its irresponsible of analysts to pretend “nothing happened” during 2012, and just act that inflation dropping under the target band and unemployment rising is unconsequential.”
Yes, they have a duty to understand why these things happened, and they also have a duty to explain why lower interest rates would be the solution. “It’s worth a try” is about as sound an argument here as it was in that old Cheezels ad.
That’s a great way to look at it. The challenge is to explain what was going on last year and why now is different.
Very true Miguel, the comment “it’s worth a try” vexed me a bit as well.
The lesson I took from it though was that if we have a former bank economist rolling around saying things like that, the idea of what is going on in the macroeconomy for the typical lay person must be a bit fuzzy at the moment. It’s hard because the banks and the RBNZ seem to explain everything very clearly in terms of decisions and drivers – so I’m not entirely sure what to think about any residual fuzziness out there.
I’d guess that the residual fuzziness stems from two sources:
– genuine disagreement about what the macroeconomic conditions are, where they are headed, and what the best policy is (e.g., how fast is the Ch’ch rebuild likely to get going?)
– the economy looking different from a textbook example. Last year had high headline inflation and high unemployment (relative to targets) at the same time. Yes, macroeconomists can explain them, but not in simple way.
“Last year had high headline inflation and high unemployment (relative to targets) at the same time.”
Indeed, communicating what we mean by “inflation” is a tough thing – of course the high headline CPI number wasn’t inflation, and actual inflation (where the factor model would be our closest pick) was still restrained.
I find this issue more fascinating than I probably should – in essence many in society seem to think that the RBNZ controls the cost of living, when in fact the cost of living is determined by a range of factors. Whether “inflation” in the way it is interpreted is in fact the best way of communicating what the RBNZ does is as a result an open question – which is where the NGDP people like to jump in.
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