(This isn’t the follow-up post on real interest rates.)
It is gratifying to see an apparently reputable NZ economist such as Reddell explain the long term effects of an overvalued exchange rate, and that the NZD is still overvalued. I had thought NZ economists, perhaps for political reasons, remained in denial on this point. Does he have a view, do we know, whether the Reserve Bank could be more active in encouraging the exchange rate down, other than occasionally attempting to talk it down?
I think the second sentence is a little unfair, although it does depend what people mean by “overvalued”. Most prominently, Graeme Wheeler routinely highlights that the exchange rate appears out of line with long-term fundamentals.
On the question the commenter poses, I do have view and the answer is “typically not”. At present, I think the Reserve Bank has the OCR set too high, and will need to lower it. At the margin, the overly tight monetary policy in recent years has left the exchange rate a little higher than otherwise.
The other instrument the Reserve Bank has at its disposal is foreign exchange intervention. I have come and gone over the years on whether the Bank should be able to do such intervention, but no one believes it can make any material or sustained difference to the sorts of real exchange rate misalignment I was talking about in the earlier post.
Central banks can do things that make a difference to the real exchange rate for short periods of time. Monetary policy makes more difference than intervention. But sustained misalignments, over decades, are real phenomena, not monetary ones. To understand those sorts of sustained pressures, one needs to look to what drives differences in real interest rates over long periods. And, again, the answer isn’t monetary policy (as the Bank explained here). Regulatory policy doesn’t make much sustained difference either, although there are some intriguing suggestions to the contrary here.