Labour on monetary policy

Alex Tarrant of had an interesting article earlier this week on the approach the Labour Party plans to take on monetary policy and Reserve Bank issues.    It seems that we should take it as a reasonably authoritative description, even though the formal policy has yet to be released. Labour’s finance spokesman Grant Robertson  described it thus

Useful write up from Alex Tarrant on monetary policy in NZ, including some thinking from yours truly.

From the article

Labour’s stance that the Reserve Bank of New Zealand’s (RBNZ) price stability goal should be accompanied by a focus on employment will not see it propose a specific, nominal employment or unemployment figure for the central bank to target, finance spokesman Grant Robertson told

Meanwhile, Labour is set to follow the US example of not outlining which of price stability or employment the central bank should prioritise if the two goals were to clash at any point, he said.

Being picky, one might hope that Robertson appreciates the difference between real and nominal targets:  ‘nominal’ is usually a term referring to price measures, money supply measures, or even nominal GDP (the dollar value of all the value-added in New Zealand), while “real” usually refers to quantities/volumes, or to a price-change adjusted for the movement in the general level of prices (eg real house prices, or real interest rates).    Employment or unemployment are “real” variables, not nominal ones.

Mostly I don’t have too much concern if a Labour-led government were to seek to amend the Reserve Bank Act, or to put words in the policy targets agreeement for the new Governor next March, that made some reference to employment or unemployment.  So long, that is, as no one thinks it will make any difference.

No one seriously doubts that monetary policy choices can affect employment/unemployment in the short-term.  But, equally, no one seriously thinks that monetary policy can make much difference to those variables over the longer-term.

Monetary policy affects employment/unemployment in the shorter-term to the extent it affects economic activity.  And thus, when the Policy Targets Agreement states, as it has since 1999 when the incoming Labour Minister of Finance inserted the words, that the Bank should avoid “unnecessary instability in output”….

In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner, have regard to the efficiency and soundness of the financial system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate.

….it was already enjoining the Bank to be concerned about the shorter-term employment/unemployment implications of its monetary policy choices.  And in inserting those words it was really just describing –  to help make it better understood to a wider audience –  what it was the Reserve Bank had been doing anyway.  Those considerations were the reason why, from the very first Policy Targets Agreement, price stability had been something to be pursued over the medium-term, with explicit provision for various shocks to prices.  If the Reserve Bank had attempted to fully offset those shocks –  GST increases, or petrol price increases for example –  it would have come at a cost of unnecessarily disrupting output and employment.

So one option for Labour could simply be to add in “employment” or “unemployment” to the existing list of things the Bank should try to avoid unnecessary instability in.

It is also worth noting that Policy Targets Agreements have long opened with descriptions of what a monetary policy focused on low and stable inflation is trying to achieve –  again, mostly an opportunity to remind people that price stability isn’t just an end in itself.   Under the current government, those words have read

The Government’s economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders.  Price stability plays an important part in supporting this objective.

Although it isn’t stated explicitly, presumably high employment/low unemployment is part of that mix.

But under the previous (Labour-led) government, it was explicit.  These words were added to the PTA in 2002 by Michael Cullen when Alan Bollard took office

The objective of the Government’s economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives.

Of course, those words made no discernible difference to how the Bank ran monetary policy. But then they weren’t really meant to: it was more a matter of “virtue-signalling”: “we care, and monetary policy isn’t just some Don Brash thing”.

And so a challenge that should be put to Grant Robertson and his colleagues is to clarify whether they think that adding a “focus on employment”, whether to the Act or the PTA is intended to make any substantive difference whatsover, and if so how?

In his interview, Robertson refers to the example of the United States, where the Federal Reserve is often described as having a dual mandate.   In fact, in statute that isn’t really true.  Here is what the Federal Reserve Act says of the objectives of monetary policy

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

The goal, in the somewhat outdated language of the 1970s, is to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production”.    All the rest of it is simply a description of outcomes that, over time,  pursuing that nominal (money and credit) target can help achieve.

Of course, you won’t often hear Federal Reserve officials highlight that statutory goal –  and they will often talk of “dual objectives” –  but it does highlight that there isn’t an easy off-the-shelf model of legislative wording for Labour to adopt.

A few years ago, recognising that these issues were now the subject of active debate in New Zealand, the Reserve Bank did a Bulletin article collecting and classifying the statutory and sub-statutory (eg PTA type documents) monetary policy objectives for a variety of advanced countryies  If I say so myself, it remains a useful reference (partly in highlighting the different roles that different ways of framing objectives can play –  some are explicitly aspirational, some more accountabilty focused, some language is old and some new etc).  In many of the countries, employment pops up somewhere or other –  but mostly, apparently, in that same sense that we’ve seen in New Zealand, or in the US statutory objective, that a well-run monetary policy will contribute over time (perhaps in quite small ways) to a well-functioning economy, and labour market.

Robertson has also talked about the statutory language in Australia.  The Reserve Bank of Australia Act specifies (as it has since 1959)

It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:

a.the stability of the currency of Australia;

b.the maintenance of full employment in Australia; and

c.the economic prosperity and welfare of the people of Australia.

But surely the challenge for Robertson is “so what”?    Is there any evidence he can point to suggesting that, over time, the Reserve Bank of Australia (or the Federal Reserve) have run monetary policy materially differently from the Reserve Bank of New Zealand?    Past research the Reserve Bank has done looking at exactly that issue suggested not.

Perhaps this might seem a curious stance for me to be taking.  I’ve been repeatedly critical of the Reserve Bank’s conduct of monetary policy over the last couple of years  at a time when the unemployment rate that has lingered well above estimates of the NAIRU  (while, curiously, Robertson has often been a defender of the Governor).    But it is most unlikely that any sort of weak reformulation of the statutory goal would make any material difference, especially when  according to Robertson

Labour is set to follow the US example of not outlining which of price stability or employment the central bank should prioritise if the two goals were to clash at any point, he said.


He told that Labour is not going to tell the RBNZ whether one is more important than the other.

The Bank’s failures over the last few years, to the extent that they can be seen as such, have been mostly about forecasting, combined with some over-confident priors, not about policy preferences, or an aversion to seeing high employment/low unemployment.

But if Labour really wants to give the Reserve Bank two objectives, and not even subordinate one to the other (on, for example, the basic grounds that in the long run nominal instruments –  monetary policy –  can only really achieve nominal targets), it is simply fairly explicitly abdicating what are inherently political choices to unelected technocrats.    The strongest case for an independent Reserve Bank is when there is a widely-accepted single target.

Then again, perhaps what is really going on is just “virtue-signalling”.  I’m sure Labour has access to plenty of people who can tell them that the RBA, the Fed, the Bank of England and the Bank of Canada –  all with different ways of phrasing monetary policy goals –  don’t do things much differently from each other, or from the Reserve Bank of New Zealand.  Each will make mistakes at times, each with have idiosyncrasies, and from time to time each might have poor decisionmakers, but there is just no evidence that the framing of the New Zealand target keeps the Reserve Bank from making good policy.  But promising to tinker with the central bank goals probably sounds good in certain quarters –  suggesting that the speakers aren’t dreaded “neo-liberals” and might be “sound” on other stuff.

The Tarrant article also confirms that Labour is looking at governance changes for the Reserve Bank.  Sadly not the right ones.

If Labour leads the government after the 23 September general election, it will immediately launch a review into its proposals. This will also include a look at a Labour preference of taking sole rate-setting responsibility from the RBNZ Governor in favour of a rate-setting board that includes the Governor, his deputies and potentially other voices within the bank.

I hope Robertson and his colleagues bear in mind that governance reforms along exactly those lines –  entrenching a legislative role for internal technocrats –  was rejected by the previous Labour government in 2001.  I thought they were right to do so then (even though at the time I held a role that Labour’s independent reviewer, the academic expert Lars Svensson, thought should be a statutory member of the decisionmaking monetary policy committee), and I hold to that view.

At very least, a decisionmaking committee comprised of internal line managers would necessitate wider changes.   Since the case for moving away from a single decisionmaker is to reduce the risks associated with one person, one shouldn’t just move to a system where that one person, together with people s/he appoints/remunerates, make the decisions.  In the right hands, it might work fine, but we build institutions to protect us against bad outcomes and people who turn out to be poor appointees.  The sort of Governor one might have to worry about isn’t likely to be appointing people who will systematically differ from him/her.  If deputy or assistant governors are to be given statutory decisionmaking powers, those appointments (and that of the Governor) need to be ministerial appointments.  But I’m not aware of any other New Zealand government agency where a group of line managers get to make key policy decisions (perhaps Robertson is?).  Far better to use line managers to service (provide the research and analysis to) a decisionmaking committee, appointed by the Minister of Finance, and made up of a mix of internal and external people (as in Australia or the UK, and –  in a different system of government –  the US).

Although I don’t agree with their specific solution, on this issue I think the Green Party is much closer to proposing a good model than Labour (at least on the evidence of this article) is.  The same goes for enhancing the openness and transparency of the Reserve Bank –  another issue Labour seems not greatly interested in.  On that score, one option perhaps the parties on the left could think about is to require the Reserve Bank to publish, at least six-monthly as part of a Monetary Policy Statement, its estimates of the NAIRU (and perhaps other medium-term trend real variables, such as the natural rate of interest, and the projected trend rate of labour productivity).

There are plenty of aspects of the Reserve Bank legislation and practice that warrant review and reform.  Time has moved on, the Bank’s responsibilities have changed gradually etc.   If Labour is in the position to lead a government after the election, I hope they would be open to setting the terms of their review sufficiently broadly to encompass those issues (eg decision-making, appointment procedures, transparency, openness, the allocation of prudential policymaking powers between the Bank and the Minister etc).  I doubt any of these are really vote-winners, but they are the sort of issues that a modern responsible competent government would put on its agenda, for a tidy-up and modernisation.

Perhaps there are votes in promising to rearticulate the monetary policy objectives. But if so, it is more likely to be through “virtue-signalling”, than through the likelihood that  the sort of stuff Labour is talking about would make any material difference at all either to how monetary policy is actually run, or to the resulting economic outcomes.  Surely Labour must know that.  But does it bother them?

New Zealand has serious long-term structural economic underperformance challenges that need to be grappled with.   Sadly, the current government seems largely indifferent to them.  One can only hope that as policy programmes emerge over the next few months, the opposition parties will be offering some serious alternatives.  At present, there doesn’t appear to be much reason for hope on that score.