Grant Robertson and a 21st century monetary policy

Grant Robertson  has a statement out today asserting that “Monetary Policy Must Get into 21st Century”.  Setting aside the fact that his party was in office for half the 21st century so far, had two reviews undertaken of the framework (one by Lars Svensson, an internationally-regarded expert, and one by the Finance and Expenditure Committee), and made no changes to the thrust of the framework (goals, powers, responsibilities etc), it really isn’t clear what Robertson wants.   He talks of wanting “modern tools”, but the tools our Reserve Bank uses are entirely normal.  Indeed, since the OCR was introduced to New Zealand only in March 1999, it must almost count as a 21st century tool.  Going into the last election, Labour did propose a (fairly weak) new tool, the variable Kiwisaver rate, but indications since have been that they were backing away from that.  So what alternative tools does Robertson now have in mind?

Robertson rightly points out that inflation has not been at 2 per cent –  the Bank’s target –  since the current Policy Targets Agreement was signed.  We didn’t have that problem previously –  inflation was, if anything, typically a bit above the mid-point of the target range.  That suggests the problem is not with the goal –  a medium-term focus on price stability  – but with the way the Reserve Bank has been handling incoming information.  Quite possibly the challenges they face have intensified in recent years, but despite having full policy flexibility –  never close to zero interest rates –  they haven’t handled them very well.  One might reasonably raise questions about that failure, and the failure of those charged with holding the Bank (and the Governor personally) to account (the Board and the Minister), but there is just no evidence that the target or the tools are the problem.

As I’ve said before, I’m not suggesting the way the Act is written is ideal, and if we started from scratch I would probably suggesting writing the goal a bit differently.  But doing so would be to help articulate why we aim for something like price stability over the medium-term.  It would be unlikely to make much difference at all to how policy was actually conducted.  That depends primarily on the Governor and the senior advisers he gathers around him.

Better monetary policy –  delivering better outcomes around 2 per cent inflation –  over the last few years would have narrowed the gap between New Zealand and world interest rates, which was (temporarily) unnecessarily widened by the Governor, but it wouldn’t have closed it.  That gap has been there for decades, and isn’t a reflection of how the Reserve Bank runs monetary policy.  There are things that governments can – and should – do that would sustainably close the gap, but (rightly) they aren’t things the Governor or the Reserve Bank has any power over.

A previous rant on much the same subject from a few months ago is here.


13 thoughts on “Grant Robertson and a 21st century monetary policy

  1. Variable Superannuation has been used in Singapore since 1955.

    “When the CPF was started in 1955, both employees and employers contributed 5% of an employee’s pay to the scheme. The rate of contribution was progressively increased along with the growth of Singapore’s economy, reaching 25% for both employers and employees in 1985. The principle of equal contribution was abandoned in 1986 due to a sharp recession, when the employer contribution was cut to 10% of an employee’s pay in an effort to keep Singapore attractive to business. The employer contribution rate reverted to the same level as the employee rate until the 1997-1998 Asian Financial Crisis, when the rate for employers was again lowered to 10% for workers 55 years or younger. Since then, the employer contribution rate has been gradually increased, with ongoing economic problems blamed for postponing the reinstatement of the original principle of equal contribution.[3] Employers currently contribute 3 fewer percentage points of salaries over S$750 for employees up to 55 years old.[4]”


  2. A much more fundamental question that Grant Robertson ought to be asking is why we are collectively so uninformed that we blithely accept the status quo without the vast majority of us even knowing that the money we use is in fact bank promises to pay notes and coins, and that what makes it lawful to pass on to someone else a bank’s promise to pay notes and coins, as if the promise were money, is the UK’s Promissory Notes Act 1704, or whatever remnants of it have found their way into New Zealand legislation since New Zealand was granted independence from the UK. Time and time again, the whole system has shown itself to be systemically unstable.

    Simply put, we have a systemically unstable debt-based monetary system, whereby we are all, in effect, collectively paying interest to banks on every dollar of the approximately $250 billion in circulation, except for notes and coins, which constitute less than 2% of the money in circulation.

    A viable alternative would be to have a systemically stable Sovereign Money banking and monetary system, in which banks would cease to be money creators and would be forced by law to become moneylenders — i.e. financial intermediaries — earning honest profits from the margins between the interest rates that they pay their depositors and the interest rates that they charge their borrowers — which is what all economics students are erroneously taught is what banks do anyway!

    ALL of New Zealand’s money — coins, notes and electronic cash — could be created ex nihilo, interest-free and debt-free, by the RBNZ at a rate to just keep inflation in the middle of the target band. All new money so created would be spent into the real economy by the government according to its democratic mandate, where it would circulate permanently. At a 3% rate of economic growth and an inflation rate of 2%, the RBNZ would be creating approximately $12.5 billion of new money per year, and the total tax take could be reduced by the same amount, leaving taxpayers that much better off. What’s not to like about that?

    Readers who consider themselves intelligent may learn more by visiting and and


  3. A couple thoughts: –
    1) I’d be interested in your thoughts on a variable rate savings scheme to assist managing inflation. Similar to Labour’s idea, but most likely separate from kiwisaver. It seems to me that setting the OCR in the hope that it would flow through to variable mortgage rates and thus impact consumers misses out on impacting on those with fixed rate mortgages, or no mortgage. Adjusting the OCR also impacts savers in the opposite way intended. Taking a bit from everyone and putting it in a savings scheme for later seems to me likely to have a broader impact.
    2) Not sure I agree that we would have a narrower interest rate differential with the world if we had 2% inflation. Yes RBNZ widened the gap in 2014, but if something had happened to get our inflation to 2% wouldn’t we now need interest rates to be 4% (pick a number) in order to keep inflation under control?


  4. On your second point, it was the real interest rate gap I had in mind, but it is an arguable point. my real point was that the structural gap between NZ interest rates and those in the rest of the advance world isn’t down to the way monetary policy is run, the inflation target etc, but to real structural economic factors (the gap between desired savings and desired investment at the “world” interest rate. The RB isn’t responsible for, and can’t sustainably affect, that gap.

    On the variable savings scheme, I’m sceptical about how much difference it would make. Remember that if take money from people temporarily and put it in an account with their name on, giving them access a few years later, they are just as wealthy as ever, just (in some cases) temporarily cash-flow constrained. For anyone who isn’t cash constrained, it won’t make any difference to their spending. For others it will make a difference – the people in their 30s and 40s with huge mortgages – but it will also fall heavily on people with no debt and very little income (poor people).

    You are right that the OCR doesn’t affect people with existing fixed rate debt, but since the (expected path of the) OCR influences longer-term bond rates, it does influence the rates new fixed rate borrowers face – not just for a few months, but for the life of those fixed rate agreements. And de-emphasizing the OCR would also mean reducing the role of the exchange rate. In some respects, and for some shocks, that might be quite attractive, but it might mean that quite large changes in the variable savings rate would be needed to have the same effect.

    I’m expecting a commenter to now highlight the Singaporean savings scheme. It isn’t primarily a variable scheme, but the govt has temporarily varied the contribution rate from time to time – from memory that involved temporary cuts to the contribution rate (much easier to sell – giving more money to people – than the other way around).


    • Singapore Super contribution moving from 5% in 1955 to 25% in 1985 and then a drop to 10% due to GFC and now rising again as the economy booms is not a variable? It is clear they are using superannuation to control consumption but they do also have monetary policy that moves interest rates up or down. But it looks like the intent is to provide a more stable interest rate and exchange rate environment.


  5. Michael et al
    Im unconvinced that the RB’s management of monetary policy has not been exemplary, although clearly that is debatable.
    In this conversation it is important to recognise what is the cart and what is the horse. In this case the cart is the policy, tools, decisions, etc etc. The horse is the regulatory architecture, ie how power and responsibility is defined.
    Discussions about the details of policy are fine, but actually rather pointless in NZ because of how power is allocated.
    If Grant Robertson wants to see things done differently he needs to focus on how the RB operates not on what they have done.
    For the last election David Parker’s RB policy for Labour was to amend the Governor-Minister contract to include more than CPI and Financial Stability. That is still looking at the cart.
    It would be more interesting if Grant (who replaced David as Labour Finance spokesman) was interested at looking at the structure of the RB’s powers (horse).
    As I note above, Ive no problem with the RB’s handling of monetary policy. Of course there have been sub-optimal decisions, but no one is perfect. There is no evidence of systematic errors.
    But for me the lessons from Bernake’s book about the Fed (and companion books on the US handling of the GFC by Geithner and others) is how power in the USA is spread and balanced and how that forces debate and a contest of ideas/policies.
    NZ’s entire government structure has a tendency towards monochrome. Parliament does not have a lot of brilliant people who get excited by (and interested in) things like monetary policy. We don’t have agencies that regulate regulators. There is a strong tendency to “if it an’t broke..”
    David Parker’s policy illustrates the difficulty opposition politicians have in this particular field. His desire to expand the RB targets was widely reviled. Clearly its a tricky area to even debate.


    • Thanks Tim. Interesting perspective.

      In some ways the case for changing the architecture is a bit easier if the incumbents are judged not to have been doing overly well (the two aren’t logically connected, but it is true nonetheless – Lars Svensson was very reluctant to recommend change to the architecture in NZ because he had such a high regard for how Don Brash had actually done the job as single decisionmaker). Also, the Governor’s term is up next year, and if he wants another term there is reasonable debate to be had about whether his record warrants reappointment (bearing in mind that everyone is human and so mistakes are inevitable.

      But in the longer term, I think the organizational reform issues are more important (and, of course, more enduring). I’ve been arguing for change in that area for at least 15 years, even though for most of that time I probably agreed with most of the individual decisions the RB was making. I am a bit puzzled as to why neither Labour nor National is willing to pick up the issue of organisational/governance reform, including strengthening transparency and external accountability.


  6. To pick up on Lindley Smith’s comment:

    ” It seems to me that setting the OCR in the hope that it would flow through to variable mortgage rates and thus impact consumers misses out on impacting on those with fixed rate mortgages, or no mortgage.”

    It seems almost to have become part of the conventional wisdom that monetary policy works, to a large extent if not mostly, through an ‘income effect’ – ie, raising/lowering the OCR works by reducing/increasing the disposable incomes of those who already have borrowed.

    As Lindley points out, that effect is offset by an opposite effect for savers. But, as has sometimes been suggested to me, monetary policy ‘still works’ because (a) New Zealand has more borrowing than saving ie, a significant proportion of borrowing by New Zealanders is funded by savings from abroad and (b) borrowers have a higher propensity to spend than do savers (that’s why borrowers are borrowers and savers are savers).

    All of which, I think, mostly, misses the point. When I went to school, the effect of monetary policy was thought of mainly in terms of how interest rate adjustments affected future decisions to borrow/save, by altering the cost/reward for saving/borrowing (relative to rates of time preference and hurdle rates of return). In other words, interest rate adjustments impacted on the macro economy by influencing decisions about whether to bring forward or to defer future spending, much less through increasing/decreasing/redistributing disposable incomes.

    There are two things about today’s ‘monetary policy works through affecting the interest rate on existing debt/savings’ view that I find interesting:

    (a) it implies a role for the Reserve Bank akin to a ‘fiscal regulator’, with its monetary policy working in a manner similar to how tax rate adjustments are thought to have a macroeconomic effect; and

    (b) to some extent it implies that monetary policy works through the effect it has on transferring income as between New Zealand (borrowers) and foreign (savers).

    Is that how we really like to think monetary policy works? Or would it be better to go back to thinking more in terms of the effect interest rates have on decisions about future borrowing/saving decisions, and less in terms of the effects they have on the disposable incomes of those who already have accumulated borrowings/savings?


    • There is alot of talk of NZ debt being higher than NZ savings but RBNZ numbers confirm that NZ household debt equates to NZ households savings.

      Therefore there is zero effect on NZ households cashflow and consumption patterns whether interest rates rises or falls. But where interest rates directly affect are businesses that do rely on debt for growth or the government when they issue NZ bonds to fund their expenditure.

      The first business that is directly affected by rising interest rates is the building industry. It is therefore rising interest rates that wreck the economy and wreck businesses and slow down building supply.


  7. ” It seems to me that setting the OCR in the hope that it would flow through to variable mortgage rates and thus impact consumers misses out on impacting on those with fixed rate mortgages, or no mortgage.”

    There is no hoping here. The OCR directly affects and impacts on interest rates. Check out the key benchmark 90 day bank bill rate. It is a mirror image of the OCR. Banks set their margins on this key 90 day bank bill rate.


  8. “When I went to school, the effect of monetary policy was thought of mainly in terms of how interest rate adjustments affected future decisions to borrow/save, by altering the cost/reward for saving/borrowing (relative to rates of time preference and hurdle rates of return).”

    You cannot have more savings sitting in a bank account without the bank having to loan it out to make a margin. Higher bank savings equates to higher lending. Interest paid to savers are a cost to the bank and savers are a creditor and a liability on the banks books. If savings grow too fast banks become unstable.


    • Banks can’t lend out deposits as, like you say, they are a bank liability – just as a home owner can’t lend his or her bank mortgage. Deposits depend on credit creation which makes the banking system ‘special’ relative to your typical industry. And having recently seen ‘The Big Short’, a good reminder of how special banks/some bankers are….!!!!


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s