Fiscal policy in the wake of Covid

When the Reserve Bank and Treasury advertised a full-day workshop with the title “Fiscal and Monetary Policy in the wake of COVID”, I immediately signed up to attend. It sounded like a good idea for an event. After all, lots of tools were deployed, some new, some old, some deployed less than usual, some much more. And we’ve had a Budget, and projections from both agencies suggesting that the economy is now getting pretty close to operating at full capacity (albeit a capacity a little diminished by Covid restrictions).

It was just a shame about the execution. Notably, even though monetary policy has been the principal tool for macroeconomic cyclical stabilisation for decades – and not just since 1989 – here and abroad, there was not a single paper looking at the role of monetary policy, past, present or future. The Governor didn’t attend – which is fine – but nothing of substance was heard from any senior Bank figure. Orr’s deputy for macro policy, Christian (“The Future is Maori”) Hawkesby contented himself with opening remarks that had just some bonhomie and his recitation of a Treasury prayer (which, to add to the strangeness, seemed to appreciate “skilled workers” but not the rest of the public), but not a word of substance. There were a couple of technical papers from Reserve Bank researchers in the afternoon session, but one was little more than an early-stage in a research agenda on the distributional aspects of monetary policy (the paper itself couldn’t shed much light when the only asset in the model was bonds), and the other – on dual mandates – didn’t seem to offer any fresh insight.

So the stage was largely left to The Treasury, and particularly a series of three papers (complemented by a presentation from a US academic) that seemed dead-set on making the case for a bigger and more expansive role for fiscal policy and government debt in the new post-Covid world. Bureaucrats making the case for a bigger and more powerful bureau.

First up – and clearly most important – was the Secretary to the Treasury. She spoke for 40 minutes, but then took no questions (and, in an amateur-hour effort, the text of her speech was then not available until more than a day later). The Secretary is still quite new to the country, to the job, and to national economic policy matters. Probably most non-government attendees (of whom there were many, in a well-attended event) had seen and heard little or nothing of her before. So it didn’t speak well of her that she wasn’t willing to engage, despite having made a barely-disguised (“I would stress that we are not making policy recommendations”) bid for quite an upending of the way macro management is done her, in ways that would just happen to favour her agency.

But what of the substance? It was a workmanlike effort (NB with a minor mistake in footnote 2) but hardly persuasive to anyone not already champing at the bit for fiscal policy to do well. For example, there was no serious discussion about the effectiveness of monetary policy. The Governor has previously told us he thinks monetary policy has been as effective as ever. The Secretary seems to disagree, but we can’t be sure – perhaps she just thinks fiscal policy is even better, but she doesn’t make that case either. Much in her case seems to rest on the effective lower bound on nominal interest rates but (a) as the next Treasury speaker acknowledged that is not some immoveable barrier, and (b) she offers no thoughts on the effectiveness or otherwise of things like the LSAP programme. Surely one starting point for thinking about the future might involve some careful diagnostic work reaching a thoughtful view on what roles the various elements of fiscal and monetary policy played in economic outcomes over the last 15 months. But neither she, nor anyone else on the day, attempted anything of that sort. Remarkably no one – from the Bank or Treasury – looked at the options and merits for removing – or greatly easing – the ELB so that at least ministers have effective choices in future severe downturns,

Quite a bit of Treasury’s thinking – or at least their marketing – seems to have been shaped by the success of the wage subsidy scheme. And it was a success – getting money out the door quickly, at a time when the government had just done the unprecedented and (a) shut the borders, and (b) simply compelled most people not to go to work, or do anything much else. It provided immediate income support, and probably had some beneficial effects beyond that (some smart person might attempt to model what difference it has made to outcomes not just last March/April but now). But it isn’t exactly a conventional event of the sort we can expect to see every cycle. And the primary consideration wasn’t really macroeconomic stabilisation at all – the whole point of the lockdowns was to aggressively (but temporarily) reduce activity, including economic activity – but income relief/support (as unemployment benefits have an incidental automatic stabiliser benefit, but aren’t primarily about macroeconomics). There are always going to be one-off events when the the government’s spending capabilities need to come into play – one can think of earthquakes (where fiscal measures and monetary policy will often tend to work in opposite directions, since earthquakes cause real disruptions and significant wealth losses, and but also generate a lot of fresh (reconstruction demand), plagues, wars, and so on. But it is seems like a category error to use such episodes as the basis for some sort of generalised play for more routine use of discretionary fiscal policy with cyclical stabilisation in view, when most recessions are quite different in character.

And even just thinking about the last 15 months or so, neither the Secretary nor her colleagues seemed to make any effort to unpick the effects of the wage subsidy scheme from the rest of the fiscal policy initiatives of the last year. One could easily imagine an alternative world in which the wage subsidy was used much as it was, but otherwise fiscal policy was kept much on the path it had been on at the start of last year, and at the same time the OCR was used more aggressively. How different would the outcomes for the economy have been, in aggregate and sectorally? The fiscal option involves the coercive use of state power, and politicians making discretionary choices playing favourites, while monetary policy adjusts relative prices and then let individuals make choices about how they (personally and individually) are placed to respond. And one thing that was striking about both the Secretary’s speech and the more technical discussion that followed from her colleague Oscar Parkyn is that in all their new enthusiasm for using fiscal policy more aggressively in downturns (and monetary policy less so) is that neither mentioned, even once, the exchange rate – typically a significant element in the adjustment mechanism in New Zealand recessions. New Zealand recessions often see sharp falls in international commodity prices (fortunately not this time) and the lower exchange rate acts as a buffer. But a much heavier routine reliance on fiscal policy will tend, all else equal, to hold up the exchange rate relatively more in downturns. It isn’t obvious – without a lot more analysis – that that would be a good thing.

The Secretary included this chart in her speech

It was apparently designed to show that fiscal policy in New Zealand has generally done sensible things. That might be generally true (although if so why change?), even setting aside the huge pressure loosening fiscal policy put on monetary conditions over 2005-2008, but it conveniently ignores where we are right now. This chart, which I’ve shown before, is from the recent Budget documents.

So with the output gap almost closed, the cyclically-adjusted primary balance (deficit) in 2021/22 year is expected to be almost as large as it was in 2019/20 (when the – sensible – big wage subsidy spending was concentrated. Extraordinarily, in a speech bidding for a more active role for fiscal policy in cyclical stabilisation she never mentioned this situation once – let alone engaged with why, from a macro policy perspective, such big deficits make sense now. As sceptic might suggest that this is the real world outcome when the Secretary’s textbook ideas get given some rope.

One could go on. The Treasury is clearly tantalised by the lower interest rates – although not now lower than pre-Covid – and the “appeal” of taking on more debt. But never once did we hear any serious examination of the typical real-world quality of the marginal additional public spending they had in mind (it wasn’t until the panel discussion late in the day that I heard a Treasury official – a temporary one, so perhaps not well-socialised – refer to the Auckland cycleway bridge). There was a paper reporting some model results suggesting, sensibly enough, that fiscal consolidation is most costly to GDP if done via taxes on capital income, but (symmetrically) there wasn’t a sense in the rest of the day that (say) Treasury was champing at the bit to lower company taxes. Rather they seem keen on public infrastructure – which often sounds good on paper, until we get to the concrete ideas. As it was, a discussant cast considerable doubt on one Treasury paper suggesting high payoffs to more government infrastructure spending.

We also never really heard any serious political economy discussion, or even a discussion of how we should think of the government balance sheet – is it a plaything for politicians or should it be best thought of as operating on behalf of citizens, each of whom have to make their own spending and borrowing choices. There wasn’t much about using coercion and compulsion rather than the indirect instruments of monetary policy. And, on the other hand, it was a little surprising that there wasn’t even a mention of MMT – so that in a floating exchange rate, the level of government debt isn’t really likely to be materially constrained by the market, which doesn’t mean that just any level of government debt is a socially good thing.

It was all a bit unsatisfactory really. Perhaps one could say it was just exploratory, and they are wanting to open the issues but (a) the speech was from the Secretary herself and (b) was making a case more than deeply and thoughtfully exploring the issues. We will have to see what more is in the papers they plan to release next week (a draft long-term fiscal statement and a draft insights briefing) but if the energy is with The Treasury at present, it isn’t really clear that they yet have the depth of analysis and engagement to support their enthusiasm.

And just finally, they arranged for an American professor, Eric Leeper, to speak, via Zoom, on monetary and fiscal issues. Leeper is pretty highly-regarded and has visited New Zealand previously. He is also very keen on a much greater use of fiscal policy and, it would appear, more debt (for various reasons including, he said. “the rise of the right” which didn’t seem quite relevant to New Zealand, let alone a good basis for official advice). Anyway, after the geeky bits of the presentation, he tried to make his case by reference to the Great Depression. He is clearly a big fan of Franklin Roosevelt, and was talking up the fiscal aspects of Roosevelt’s approach (while barely really mentioning the substantial monetary bits). But it was odd. Here he was talking to a New Zealand audience, championing the use of fiscal policy in the US Great Depression, but seemed quite oblivious to the fact that the US was one of the very last countries to get back to pre-Depression levels of output and unemployment. Here is the experience of the Anglo countries.

Those aren’t small differences. And as anyone who knows New Zealand economic history – or have read my past posts on it – New Zealand’s recovery from the Depression (back to pre-Depression levels by the time Labour took office) was barely at all about fiscal policy. The excellent quote from Keynes that our Minister of Finance of the time recorded in his diary, along the lines of: “if I were you I would no doubt seek to borrow, but if were your bankers I should be very reluctant to lend to you”.

When a half-baked loaf is finished cooking it can be a fine thing, but this loaf seems to need a lot more work before New Zealanders should be rushing to embrace a much more active role for fiscal policy or a lot more public debt. That includes a lot more work on what we reasonably can, and can’t, do with monetary policy.

UPDATE: A former RB colleague, now a lecturer at Sydney University, sent me a link to a paper he and a Reserve Bank researcher have written attempting to evaluate the impact of the New Zealand wage subsidy scheme. I haven’t yet read it, but it looks very interesting. Here is the end of their abstract

We then study the impact of a large-scale wage subsidy scheme implemented during the lockdown. The policy prevents job losses equivalent to 6.8% of steady state employment. Moreover, we find significant heterogeneity in its impact. The subsidy saves 17% of jobs for workers under the age of 30, but just 3% of jobs for those over 50. Nevertheless, our welfare analysis of fiscal alternatives shows that the young prefer increases in unemployment transfers as this enables greater consumption smoothing across employment states

Monetary policy

My teaser for today’s post was this tweet

If I remember correctly, the last time was probably in mid-2011 when the then OCR Advisory Group was debating when to reverse the emergency cut we’d put in place after the February 2011 earthquake. As it happens that was all overtaken by the intensifying euro crisis.

Yesterday’s Monetary Policy Statement has been described, colloquially, as “hawkish” or at least having taken a “hawkish tilt”. I’m not really sure that is warranted, but it is hard to tell.

The MPC reintroduced a projection track for the OCR for the first time since this time last year, and in that track the OCR starts to be lifted gradually from the September quarter of next year. I have never been a fan – going back to the introduction in 1997 – of the OCR projection track, since it is little more than castles in the air make believe to suppose that anyone knows now what OCR will be appropriate a couple of years hence, in turn driven by the outlook a couple of years beyond that. What we need – and what central banks can tell us sensibly – is where they think things might head by the time of the next review. But, like it or not, we have a forward track. That track was always going to show OCR increases at some point, if only for two reasons (a) the Bank’s model will always have interest rates heading back towards neutral as inflation settles around target, and (b) the LSAP programme – which the Bank claims to believe is highly effective – runs out next June.

And when the Governor was asked at the press conference how much the forward track had changed from what it would have been (unpublished) in March he simply refused to say.

But we do know, because the Committee told us, that “our medium-term outlook for growth remains similar to the scenario” in the February MPS. And their numbers support that: GDP growth over the two years to March 2022 is exactly the same (2.9% in total) as they’d shown in February, and for the following two years projected growth is just a touch lower than in February. On the other hand, they seem to have revised down their potential output growth assumptions a bit, and as a result the output gap estimates have been revised to something less negative/more positive.

RB Output gap projections, average for full year to March
Feb MPS-1.0-
May MPS-0.4-

And although they claim to believe that the economy is still below “maximum sustainable employment” I don’t think their hard numbers really back up that view. The unemployment rate is currently 4.7 per cent, they expect to be still 4.7 per cent next March, and then over the following couple of years when the output gap is projected to go materially positive they only expect the unemployment rate to drop to 4.4 per cent. On their numbers, unemployment must now be very close to the NAIRU (functional full employment, given the regulatory environment and labour market institutions etc).

What else do they tell us about the near-term? Well, there is core inflation. They include this chart

core inflation RB

That is much the same suite of indicators that led me to conclude last month

I think it is is probably safe to say that core inflation in New Zealand is now back at about 2 per cent. That is very welcome, even if somewhat accidental (given the forecasts that drove RB policy). 

Same goes for the (somewhat selective) range of inflation expectations measures the Bank summarises here

infl expecs may 21

That’s good too. Quite a lift in the last few months and now about as close as you are going to see to 2 per cent right across the horizon,

And then the Bank tells us their decision rule

The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2 percent per annum target midpoint, and that employment is at its maximum
sustainable level.

But on their own numbers, that seems to be (a) pretty much the current situation, and (b) the outlook. Now, to be sure, that statement isn’t entirely coherent because logically you have to be confident of those outcomes even after you start tightening monetary policy a bit, but set that to one side for moment.

And so I guess that is why I’m left wondering whether it is even remotely fair to characterise yesterday’s statement as having a hawkish tilt. They have rising (to record) terms of trade, significant fiscal stimulus from a big fiscal deficit, they think the output gap is all but closed, and any unemployment gap must be close to being closed, core inflation (and expectations at target) and yet they think that precisely the same monetary policy settings are warranted as was the case six months ago, more aggressive than those in place a year ago (given that the Funding for Lending Programme, which is effective, is a more recent addition). As a reminder, as recently as November they had inflation averaging 1 per cent for 2021 and 2022 (on exactly the current monetary policy).

Perhaps the operative word in that decision statement is “confident”, but realistically (a) when is macro forecasting ever confident? and (b) they must have greatly reduced uncertainty/error-margins now than was the case a few quarters ago. It isn’t as if actual core inflation is 1.5 per cent but the forecasts show it getting to 2 per cent, or actual unemployment is 6 per cent but forecasts show it getting to 4.5 per cent.

I guess the other thing I found striking about the document is that although the Bank has a couple of pages on how to think about short-term price shocks (the sort of boilerplate stuff that has appeared in MPSs every year or two for 30 years) – and I suspect they are quite right on that narrow point (eg that headline inflation of 2.6 per cent for the year to June is not, of itself, something to worry about – any more than similar spikes in, say, 2008) – there is no discussion at all of the increase in market-based measures of inflation expectations here and abroad.

In the New Zealand case those inflation breakevens from the indexed bond market are still sitting a little under (but “near”) 2 per cent, but that is a great deal higher (and thus much more reassuring) than the situation for the last few years. In the US – easiest market to get the data for if you don’t have a Bloomberg terminal – we see something like this

US inflation breakevens 5yr may 21

These breakeven numbers move around a bit but when we look, for example, at the rise in implied expectations after then 2008/09 recession it didn’t overshoot to some ridiculous, unsustained level, but settled back in a fairly orderly way (even amid some political hyper-ventiliation about inflation risks of QE) to something a bit lower than in the pre-recession period. Perhaps this time is different. Perhaps nothing will deliver average inflation anywhere near that high in the next five years. But you might expect an inflation-targeting central bank to at least discuss the point, and the possibility that the combined weight of fiscal and monetary policy will mean a drift (in some ways welcome) to higher inflation as the world emerges from Covid – especially when, at least in economic terms, the Bank’s own chart shows New Zealand to be ahead of most on that score.

And yet there is no any sign from the minutes that the Committee even robustly discussed these issues – even though, for example, just a couple of weeks earlier the Bank of England’s Monetary Policy Committee (known not just for a better class of member, but – as importantly – for more transparency) voted only by a margin of 7:2 to keep on with their bond-buying programme (a programme smaller than New Zealand’s as a share of GDP, in an economy that has been further behind New Zealand’s recovery).

So what is appropriate New Zealand policy now? I find it simply extraordinary that the Bank is continuing on with its huge bond-buying programme as if nothing has changed at all. Not only that we are told that

The Committee agreed that the OCR is the preferred tool to respond to future economic developments in either direction.

They offer no rationale for this statement. It might make some sense if things were suddenly to get a lot worse, but it makes no sense at all from here – inflation at target, expectations consistent with that, unemployment below 5 per cent – either substantively, or in view of all the criticism (often misplaced) the Bank has taken of the LSAP (“money printing”, “blowing bubbles” and so on). As I noted on Twitter yesterday, in the Budget documents there is stable suggesting that the stock of settlement cash balances is expected to rise by tens of billions of dollars over coming year (presumably as bond buying goes on and Crown issuance is pulled back). That just invites more (reputational) problems as well as complicating the eventual unwind of the huge bond portfolio. So had it been me, I’d have been cutting the LSAP now, perhaps terminating it completely within the next three months (all going according to plan). But since I do not believe that the LSAP is making any material difference to anything that matters much in New Zealand – where long-term government bond rates mostly only affect government borrowing costs – I wouldn’t have seen that as any material tightening of monetary conditions. The Bank would of course, but on their numbers there is a good case now for beginning to wind back purchases (as a policy lever).

I wouldn’t favour winding back the FLP or raising the OCR yet, but the FLP should be the next in line (after the LSAP). It is a extraordinary intervention, inconsistent with the general preference for indirect competitively neutral tools. It had a place late last year, but the current macro data suggest it should not be too long for this world (and should not be needed in future downturns now that the RB is confident they can do negative OCRs).

Lest I appear too hawkish, I should add that my decision rule would not be the one the MPC outlined. After a decade or below-target core inflation I think we probably should welcome at least some overshoot, for some period, of the 2 per cent midpoint (in core terms), if only to help cement in the public mind that 2 per cent is a target midpoint and not a ceiling.

Perhaps too the Bank is wrong about the macro situation. Perhaps there is more spare capacity than they think, in the labour market and more generally. I don’t have a strong view on that, but see no reason to think them very wrong (and I noted with interest there was no mention of the potential impact of higher minimum wages and higher benefits on either labour demand or supply, or the NAIRU – but any such effect is likely to be for the worse.)

Everyone tends to fight the last war. The decade after 2008/09 was one when too often central bankers (often egged on by markets) kept over-estimating how much inflation there was in the system, and kept getting it wrong. Perhaps that is still where central banks should err, but I would feel more confident about it in the New Zealand context if there was more evidence of careful thought/analysis, or sustained and searching debate around the MPC table, and of serious public engagement by thoughtful MPC members open to exploring differences. As it is, there is a strong sense of “trust us, we know what we are doing”, with little real evidence that they do.

Am I really more hawkish (less dovish) than the Bank. It is still hard to be sure, but there are things about their numbers on the one hand, and their policy stance on the other, that really don’t seem to add up. These include small points like the difference (a few paragraphs apart in the minutes) about how long it make take for them to be confident: first there was this

They agreed this would require considerable time and patience.

and then just a little later this

The Committee agreed it will take time before these conditions are met.

Those seem to me rather different emphases – the latter perhaps plausible, the former distinctly (probably too) dovish.

(To the Bank’s credit – and not that it greatly matters to them or their deliberations – they do not share the unreasonably over-optimistic productivity growth assumptions built into The Treasury’s Budget numbers).

Finally, I was reading last week The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival published last year (mostly written pre-Covid) and written by Charles Goodhart and Manoj Pradhan. There is a summary version of the story here. I’m still not quite sure what to make of the story, but I’m less unpersuaded than I had expected to be. Perhaps they are wrong, but it would be good to see some thoughtful central bankers and policymakers engaging on the possibilities and risks.)

Much better analysis needed

That heading probably describes a great deal of what goes on in the numerous public policy agencies in the central Wellington (well, no doubt local authorities as well) but this post is about the Reserve Bank’s latest.

Last week they released a paper headed “An overview of the distributional effects of monetary policy”. It was under the name of one their young analysts, and carries a standard disclaimer that “views expressed are those of the authors, and do not necessarily represent the views of the Reserve Bank”, but we can safely discount that. No paper on a topic this potentially contentious is going to have got out the door without the explicit imprimatur of (a) the author’s manager, (b) the Reserve Bank’s Chief Economist (that voiceless government-appointed member of the MPC, from whom we’ve had not a single speech in his entire time in office), and most probably the clearance and comfort of the Governor and the Assistant Governor responsible for monetary policy. If the (apparently largely toothless) external members of the MPC didn’t get to sign it off, equally it isn’t likely that it would have been published if they’d had any major concerns. All in all, it is only reasonable to take this document as the official view of the Bank’s hierarchy, reflecting that same hierarchy’s view of acceptable standards of analysis and argument.

It is a strange and inadequate document in a variety of ways. First, and perhaps least important, is the spin. In the previous paragraph I gave you the official, and rather neutrally expressed, title of the Analytical Not. But if you were signed up to the Bank’s email notification service you got this at the head of the email from one of their myriad comms staff.


Immediately followed by this sentence, which doesn’t appear in the Analytical Note itself, and is clearly the responsibility of the more politicised part of the Bank.

There are winners and losers when interest rates are cut, but the international evidence is not clear that this always means the rich get richer and the poor are worse off.

Note that “always”. Whoever wrote this seemed to have in their mind – or to want to feed into readers’ minds – a sense that “when interest rates are cut” it is mostly – just not “always” – a bad thing in which, typically, “the rich” get richer and “the poor” get poorer. It is about the standard one expects from a Year 10 Social Studies teacher, not from those actually charged with the conduct of the country’s monetary policy.

I didn’t want to skip over the spin, because it tells you about the standards of those at the top of the organisation. But in the end it is spin, and on this narrow point the Analytical Note itself is less bad. It is doesn’t contain those block-quoted words at all, and in fact the very first sentences of the paper, highlighted as Key Findings are

Monetary policy easing and tightening can potentially affect the distribution of wealth and income through
several channels. The overall effect of monetary policy on inequality is indeterminate and depends on the
strength of each channel, which may reinforce or offset each other.

Much less inflammatory. It is followed by the second Key Finding

International empirical evidence on the distributional effects of monetary policy is inconclusive. It is not clear
that monetary policy easing, be it through reductions in policy interest rates or by central bank asset
purchases, necessarily reduces or worsens wealth inequality and income inequality.

In other words, not the slightest suggestion that mostly – if not “always” – interest rate cuts make the rich richer and poor poorer.

I haven’t read all, or probably even most, of the international empirical studies they summarise here


and there is not even a hint of any Reserve Bank of New Zealand empirical research in the Analytical Note, so my comments in the rest of the post are really about how the Bank discusses the issues, and the evidence that reveals for how carefully and comprehensively they think through things. It isn’t a long paper – about five pages of text – but that is their choice: unlike say the Monetary Policy Statement (where we might expect this to be touched on next week) there was no practical limit to them taking just as much space as they thought was needed to give a careful treatment of the issue.

There are plenty of individually reasonable sentences in the paper, and a variety of charts (several designed to show that distributions of income/wealth in New Zealand are similar to some of the other countries that formal studies have been done for). The problem is the lack of a disciplined framework.

For example, it isn’t even clear whether what they are focused on is monetary policy actions – which they (and their models) usually conceptualise as discretionary actions taking as given developments in the (changing and not directly observable) neutral or natural rate of interest – or all changes in interest rates. There is a huge difference in the two.

Twenty five years ago, very long-term real interest rates in New Zealand (eg), proxied by indexed bond yields, were touching 6 per cent, and now they are just under 1 per cent (about the same as they were just prior to Covid). Understanding why real interest rates have fallen that far – and similar trends are evident in other countries – or even why our real interest rates are still quite a bit higher than in most advanced countries – is a challenging and contested issue. Understanding the full implications isn’t that easy either. But few seriously suppose that the cause is monetary policy – and the Reserve Bank (in all its past published material) has never been among those few. One can debate the relative contributions of demographics, productivity growth slowdowns, or whatever – again, both causes and implications – but they aren’t things that have anything more than the most peripheral connection to monetary policy as typically conceived (as conceived by Parliament in setting out the Bank’s powers and mandate).

Now, there can be some confusion in the general public mind because if the longer-term neutral real interest rate falls from 6 per cent to 1 per cent then – given that the Reserve Bank chooses to peg the OCR (it needn’t, but it generally a sensible and practical way to conduct policy – over time the Bank will need to cut the OCR by more or less the same amount. Those adjustments are announced as part of Monetary Policy Statements and OCR reviews undertaken by the Monetary Policy Committee. But if you are wanting to think and talk about the impact of monetary policy choices – and much of this discussion, at least in a New Zealand context, has been sparked by events of the last year – you want to talk about discretionary monetary policy actions: things the Bank thinks it is doing to push actual interest rates below (or above for that matter) what it thinks of at the time as the neutral rate. Anything else just conflates two quite different things. And since long-term interest rates will move about whether or not we have an active central bank, while discretionary monetary policy is a choice, if we are thinking about what value discretionary monetary policy adds we – and the Bank – should focus on the implications (all of them) of those discretionary choices.

So one of the other things that is almost entirely missing from the Analytical Note is any sense that discretionary monetary policy actions are temporary in nature. Monetary policy is about keeping unemployment as low as possible consistent with inflation staying in check (that isn’t quite the way the law is written but it is what it amounts to, and is a better framing). Most of the shocks that monetary policy responds to – although this distinction isn’t made in the paper either – are what are thought of as “demand shocks”: some events, perhaps a slump in overseas economic activity, weakens demand, activity and employment here, tending to push unemployment up and inflation down. Monetary policy is about leaning against those pressures with the aim of getting back to a full employment/inflation at target outcome faster than otherwise. But these are temporary events. As the unemployment rate gets back to sustainable/full levels, you want interest rates to be back around neutral. The temporary nature of monetary policy actions is consistent (a) with a standard view of the long-run neutrality of money (in the long run, monetary policy can affect inflation, but not materially anything else), and (b) the experience in past decades, when short-term rates went and down, through quite large cycles. The Bank’s note acknowledges this point in passing in discussing the overseas papers but not in discussing New Zealand.

There is also no discussion in the Analytical Note of the difference other regulatory regimes may make. Thus, if you are bothered by house prices developments – as you probably should be – you might want to recognise that house prices behave differently when governments intervene to restrict land use and make new building harder and slower than in markets where new land and housing supply is more responsive. But even here there is an important distinction that the Bank’s paper just does not make: even if you believe that monetary policy developments in the last year have contributed materially to the recent further rise in house prices, unless you think that Covid has driven the neutral interest rate materially lower, those effects should be short-term in nature. If you are one of those who, for example, think that within the next 12-18 months the OCR will be back to where it was at the start of last year. you should presumably think that any monetary policy effects on house prices will also be short-lived. The Bank however – not noted in this paper, but quietly in MPSs and FSRs – thinks the biggest long-term issue is land use law. If so – and assuming such regimes influence expectations and how markets react to demand shocks – they shouldn’t be taking responsibility themselves for higher house prices. Lets have some analysis on the distributional effects of land use restrictions, but you wouldn’t really expect that to be coming from the Reserve Bank – or for the Bank somehow to be taking the blame for medium-term changes in a key relative price (as it seems to by implication in, for example, the brief discussion of Figure 6).

Perhaps worse, there is almost no mention in the Analytical Note as to how the characteristics of the initial adverse shock might influence conclusions, and very little mention (I think only one) of counterfactuals – what might have happened if, given the neutral rate, monetary policy had done nothing in response to these shocks. For example, even just to take house prices again, in the last New Zealand recession house prices fell quite a bit, and if discretionary monetary policy actions limited those falls – as seems plausible and likely, directly and indirectly – I guess one think of monetary policy making home owners “richer”, but really it is simply limiting losses in those specific circumstances. And strangely there is no mention of any of the past actual monetary policy cycles in New Zealand – lots of high level handwaving but not much engagements with the specific experiences. Same goes for share prices – in this episode they are higher than they were at the start but in, say, 2008/09 it took five years for the nominal NZSE50 index to get back to the pre-recession peak. Monetary policy limited losses – in much the same way it did in the labour market – but that generally isn’t regarded as troubling, so much as the point of having the tool in the first place.

In a New Zealand context in particular, it was very odd to see no discussion of the exchange rate. In most discretionary monetary policy cycles in New Zealand, the exchange rate has done a lot of the adjustment (down and up). Over the last year or so that hasn’t been so – then again, monetary policy hasn’t done much – but surely any serious discussion of distributional effects of monetary policy in New Zealand would want to think about the exchange rate channel?

One could go on. For example, they suggest that older people are wealthier than younger cohorts, and while perhaps that is conventional it takes no account of human capital (by far the largest source of lifetime wealth for most people). And although they do talk about the labour market and unemployment it is all curiously bloodless – involuntary unemployment is a great social evil and can scar the prospects of some people for life, and so if – as it claims – monetary policy can assist in getting unemployment back down more quickly to the structural rate (while keeping inflation in check), that is a huge gain that a central bank should be shouting from the rafters, not burying in a discussion that seems overwhelmed by what has happened to house prices – monetary policy or not – in one recession in five.

Perhaps in fairness to the Bank one should repeat a couple of their concluding remarks.

In the absence of formal empirical evidence, we emphasise that we do not take a stance on how monetary policy actions by the Reserve Bank of New Zealand influence these distributions.

While noting that they could have done much more in these document to help frame discussion of the issues. And

The study of the distributional effects of monetary policy in New Zealand remains an avenue for future research. This Note is the first in a series of analytical papers that the Reserve Bank will publish in this domain.

I guess I will look forward to any future papers, but this scene-setting Analytical Note doesn’t leave one very optimistic about the overall quality of what they are likely to come up with. We deserve better: the Bank has the largest collection of macroeconomists in the country, its claim to operational autonomy really rests on perceptions of technical expertise, and yet – for what are not remotely new issues – so far this seems to be the best the Orr Bank can come up with. It simply isn’t good enough.

Central bank independence

Bernard Hickey – fluent and passionate left-wing journalist – had a piece out the other day headed thus

hickey rbnz

with a one sentence summary

TLDR: Put simply, the sort of true independence enjoyed by the Reserve Bank of New Zealand as it pioneered inflation targeting for the last 30 years is now over, and that’s a good thing.

I found it a strange piece on a number of counts, and I say that as someone who (a) does not think financial regulatory policy (as distinct from the implementation and enforcement of that policy) should be handed over to independent agency, and (b) is probably less compelled now than most macroeconomists by the case for operational independence for monetary policy. So I’m not responding to Hickey’s piece to mount a charger in defence of central bank independence. Mostly I want to push back against what seems to me quite a mis-characterisation of the effect of the Robertson Reserve Bank reforms – those already legislated, those before the House now, and those the government has announced as forthcoming. But also about the responsibility of central banks for the tale of woe Hickey sets out to describe.

It is worth remembering that, by international standards, the Reserve Bank’s monetary policy independence – de facto and de jure – was always quite limited by international standards. Under the 1989 Act the Minister and the Governor jointly agreed the target, but every Governor largely deferred to the Minister in setting – and repeatedly changing – the objective, even if details were haggled over. And with a fairly specific target, and explicit power for the Governor to be dismissed for inadequate performance relative to the target, it was a fairly constrained (operational) independence. The accountability proved to be weaker that those involved at the start had hoped, but it could have been used more.

The monetary policy parts of the Act were overhauled in 2018. There were some good dimensions to that, including making the Minister (alone) formally responsible for setting the monetary policy targets. The Minister got to directly appoint the chair of the Bank’s (monitoring) Board. And a committee was established by statute to be responsible for monetary policy operational decisions. But setting up the MPC didn’t change the Reserve Bank’s operational independence, and if it had been set up well could even have strengthened it de facto over time. The Minister did not take to himself the power – most of his peers abroad have – to directly appoint the Governor or any of the other MPC members. As it is, the reforms barely even reduced the power of the Governor – previously the exclusive holder of the monetary policy powers – who has huge influence on who gets appointed to the MPC (three others are his staff) and who got the Minister to agree that no one with any ongoing expertise in monetary policy and related matters should be appointed as a non-executive MPC members. Oh, and got the Minister to agree that the independent MPC members should be seen and heard just as little as absolutely possible (unlike, say, peers in the UK or the USA).

Hickey cites as an example of the reduced independence the Bank’s request for an indemnity from the Minister of Finance to cover any losses on the large scale asset purchase programme the Bank launched last March. I’d put it the other way round. The Bank did not need the government’s permission to launch the LSAP programme – indeed it is one of the concerns about the Reserve Bank Act that it empowers the Bank to do things (including fx intervention and bond buying) that could cost taxpayers very heavily with no checks or effective constraint. It seemed sensible and prudent of the Bank to have sought the indemnity, partly to recognise that any losses would ultimately fall to the Crown anyway. Operational independence never (should meant) operational license, especially when (unusually) the Bank is undertaking activities posing direct financial risk to the Crown. (And I say this as someone who thinks that the LSAP programme itself was largely pointless and macroeconomically ineffectual.)

What about the other reforms? I’ve written previously about the bill before the House at present, which is mostly about the governance of the Bank. It will make no difference at all to the Bank’s monetary policy operational independence (although increases the risk that poor quality people are appointed in future to monetary policy roles). That bill transfers most of the Governor’s remaining personal powers to the Board. The Minister will appoint the Board members directly (unlike the appointment of the Governor) but even then the Minister will first be required to consult the other political parties, so it is hardly any material loss of independence for the Bank. The Minister will, in future, be required to issue a Remit for the Bank’s uses of its regulatory powers – and we really don’t know what will be in such documents – but those provisions don’t even purport to diminish the Bank’s policy-setting autonomy (notably since it is much harder, probably not sensibly possible, to pre-specify a financial stability target akin to the inflation target).

Details of the next wave of reforms were announced last week. Of particular note is the provisions around the standards that the Bank will be able to issue setting out prudential restrictions on deposit-takers, including banks. I wrote about that announcement last week. Since then more papers, including the (long) Cabinet papers and an official sets of questions and answers has been released. We do have the draft legislation yet, so things might change, but as things stand it is clear that what the government is proposing will amount to no de facto reduction in the Bank’s policymaking autonomy, and only the very slightest de jure reduction.

Why do I say this? At present, the Bank regulates banks primarily by issuing Conditions of Registration (controls on non-bank deposit-takers, mostly small, are set by regulation, which the Minister has control over). Under the new legislation is proposed that Conditions of Registration will be replaced by Standards, which will be issued (solely) by the Bank, but will be subject to the disallowance provisions that are standard for regulations via theRegulations Review Committee. In between the Act (which will specify – loosely, inevitably – objectives and principles to guide the use of the statutory powers) and the Standards, the Minister will be given the power to make regulations specifying the types of activity the Bank can set standards for. Note, however, that empowering the Bank to set standards in particular areas does not compel the Bank to do so (in practice, it is likely to be a simultaneous process)

There was initially some uncertainty about how specific the Minister could get – the more specific, the more effective power the Minister would have. But the Cabinet paper removed most of the doubt.

standards 1

Backed up in the relevant text of the official questions and answers released on The Treasury’s website.

standards 2

That isn’t very much power for the Minister at all; in effect nothing at all in respect of housing lending (since once the new Act is in force the Minister will simply have to regulate to allow a Standard on residential mortgage lending, if only to give continuing underpinning to LVR restrictions). Perhaps what it would do is allow a liberalising Minister to prevent the Bank setting specific standards for specific types of lending but……that doesn’t seem like the Labour/Robertson approach. And once a Minister has allowed the Bank to set standards for residential lending, the Minister will have no further say at all: the Bank could ban lending entirely to particular classes of borrowers, ban entirely specific types of loans, impose LVRs, impose DTI limits, perhaps impose limits of lending on waterfront properties (we know the Governor’s climate change passion). For most practical purposes it is likely to strengthen the independence of the Bank to make policy in matters that directly affect firms and households, with few/no checks and balances, and little basis for any formal accountability. Based on this government’s programme, the age of central bank policy-setting independence is being put on more secure foundations (since the old Act never really envisaged discretionary use of regulatory policy, which crept in through the back door).

Hickey argues that the introduction of LVR controls in 2013 by then-Governor Graeme Wheeler required government consent. In law, it never did. If the law allowed LVR controls – a somewhat contested point – all the power rested with the Governor personally. It may have been politically prudent for the Governor to have agreed a Memorandum of Understanding with the Minister on such tools, but he did not (strictly) have to. At best, it was a second-best reassertion of some government influence of these intrusive regulatory tools.

Now perhaps some will argue that there might be something similar in future too: the Minister might have no formal powers, but any prudent central bank might still seek some non-binding agreement with the government. But I don’t believe that. If the government had wanted any say on whether, say, DTI limits were things it was comfortable with, or what sorts of borrowers they might apply to, the prudent and sensible approach would be to provide explicitly for that in legislation. The old legislation may have grown like topsy, but this will be brand new legislation. The Minister is actively choosing to opt out and given the Bank more policy-setting independence (including formally so for non-banks) on the sorts of matter simply unsuited to be delegated to an independent agency, that faces little effective accountability (see the table from Paul Tucker’s book in last week’s post).

Whether independence should be strengthened or not, the Ardern/Robertson government has announced plans that will do exactly that, while at the same time weakening the effective accountability of the Bank (since powers will be diffused through a large board, with no transparency about the contribution of individual members).

That was a slightly longwinded response to the suggestion that actual central bank independence (monetary policy or financial regulation) is being reduced, in practice or by this goverment’s reforms. I favour a reduction in the policymaking powers of the Bank around financial regulation (the Bank should be expert advisers, and implementers/enforcers without fear or favour, not policymakers – the job we elect people to do).

What about monetary policy. Hickey reckons not only (and incorrectly so far) that monetary policy operational independence has been reduced, but that it should be reduced.

As it happens, I’m now fairly openminded on the case for monetary policy operational independence. One can mount a reasonable argument – as Paul Tucker does – for delegation to an independent agency (since a target can be specified, there is reasonable agreement on that target, there is expertise to hold the agency to account etc). But it has to be acknowledged that much of the case that was popular 30 years ago – that politicians could not be trusted to keep inflation down and would simply mess things up on an ongoing basis – is a lot weaker after a decade in which inflation has consistently (in numerous countries) undershot the targets the politicians (untrustworthy by assumption) set for the noble, expert and public-spirited central bankers.

What I’m not persuaded by is any of Hickey’s case for taking away the operational autonomy. Five or six years ago, I recall him – like me – lamenting that New Zealand monetary policymakers were doing too little to get the unemployment back down towards a NAIRU-type rate (it lingered high for years after the recession) and core inflation back up to target. But now, when core inflation is still only just getting back to target, unemployment is above any estimate of the NAIRU (notably including the Bank’s) Hickey seems to have joined the “central banks are wreaking havoc, doing too much etc etc” club.

One can debate the impact of the Bank’s LSAP programme. Personally, I doubt it has any made material useful macroeconomic contribution over the last year (good or ill – I don’t think it has done anything much to asset prices generally, and not that much even to long bond prices), and as I’ve argued previously it has mostly been about appearing active, allowing the Governor to wave his hands and say “look at all we are doing”. But even if you believe the LSAP programme has been deeply detrimental in some respect or other – Hickey seems to be among those thinking it plays a material part in the latest house price surge (mechanism unclear) – why would anyone suppose that a Minister of Finance running monetary policy last year would have done anything materially different to what the Bank actually did. After all, as Hickey tells us the Minister did sign off on the LSAP programme anyway, and a decisionmaking Minister of Finance would have been advised primarily by…..the Reserve Bank and the Treasury (and recall that the Secretary to the Treasury sits as a non-voting member of the MPC, and there has been no hint that Treasury has had a materially different view).

I think the answer is that Hickey favours a much heavier reliance on fiscal policy – even though he laments, and presents graphs about, how much additional private saving has occurred in many advanced economies in the last year, the income that is being saved mostly have resulted from….fiscal policy. Again, I think the answer is that he wants the government to be much more active in purchasing real goods and services – not just redistributing incomes. I suppose it comes close to an MMT view of the world.

But again there is little sign of anyone much – not just in New Zealand but anywhere – adopting this approach, or even central bank independence being restricted in other countries (what there is plenty sign of is central bankers getting out of their lane and into all sorts of trendy personal agendas – be it climate change (non) financial stability risks, indigenous networks or whatever.

None of this agenda seems to add up when it comes to events like those of the last 15 months. We know that monetary policy instruments can be activated, adjusted, reversed almost immediately. We know that governments are quite technically good at flinging around income support very quickly. But governments – this one foremost among them – are terrible at, for example, wisely using money to quickly get real spending (eg infrastructure) going in short order, and such projects once launched are hard to stop or to adequately control. Monetary policy is simply much much better suited to the cyclical stabilisation role.

Hickey is a big-government guy, and there are reasonable political arguments to have about the appropriate size and scope of government, but they haven’t got anything much to do with stabilisation policy – and nor should they. One doesn’t want projects stopped or started simply for cyclical purposes – brings back memories of reading of how the Reserve Bank wasn’t able to build its building for a long time because the governments of the day judged the economy overheated.

The (unstated) final part of his story seems to relate to a view that perhaps monetary policy has reached its limits. It would be a curious argument, given that much of his case seems to rest of the damage monetary policy is doing (impotent instruments tend to be irrelevant, even if deployed). He repeat this, really nice, long-term Bank of England chart

hickey 2

The centuries-long trend has been downwards, and many advanced country rates are either side of zero. But interesting as the chart genuinely is, including for questions about the real neutral interest rate (something monetary policy has little or no impact on), it tells one nothing about (a) who should be the monetary policy decisionmaker, or (b) the relative roles of fiscal and monetary policy. After all, the only reason why nominal interest rates can’t usefully go much below zero yet is because of regulatory restrictions and rules established – in much different times – by governments and central banks. Scrap the unlimited convertibility at par of deposits for bank notes – not hard to do technically – and conventional monetary policy (the OCR) immediately regains lots more degrees of freedom, able to be used – easily and less controversially – for the stabilisation role for which is it the best tool.

To end, I wouldn’t be unduly disconcerted if the government were to legislate to return to a system in which the Bank advised and the Minister decided on monetary policy matters. It might just be an additional burden for a busy minister, but it would be unlikely to do significant sustained harm (and one of the lessons of the last 30+ years is that central bankers and ministers inhabit the same environment, have many of the same ideological preferences etc) in a place like New Zealand. But to junk monetary policy as the primary cyclical stabilisation tool really would be to toss out the baby as well as the bathwater, no matter how big or active you think government tax and spending should be.


The possibility of a sustained rise in the inflation rate (internationally and here) has been getting a lot of attention in the last few months. Note that I call it a “possibility” rather than a “risk”, because “risk” often has connotations of a bad thing and, within limits, a rise in the (core) inflation rate is something that should be welcomed in most advanced economies where, for perhaps a decade now, too many central banks have failed to deliver inflation rates up to the targets either set for them (as in New Zealand and many other countries) or which they have articulated for themselves (notably the ECB and the Federal Reserve). I’m not here engaging with the debate on whether targets should be higher or lower, but just take the targets as given – mandates or commitments the public has been led to believe should be, and will be, pursued.

Putting my cards on the table, I have been quite sceptical of the story about a sustained resurgence of inflation. In part that reflected some history: we’d heard many of the same stories back in 2010/11 (including in the countries where large scale asset purchases were then part of the monetary policy response), and it never came to pass – indeed, the fear of inflation misled many central banks (including our own) into keeping policy too tight for too long for much of the decade (again relative to the respective inflation targets). Central banks weren’t uniquely culpable there; in many places and at times (including New Zealand) markets and local market economists were more worried about inflation risks than central banks.

I have also been sceptical because, unlike many, I don’t think large-scale asset purchases – of the sort our Reserve Bank is doing – have any very much useful macroeconomic effect at all (just a big asset swap, and to the extent that there is any material sustained influence on longer-term rates, not many borrowers (again, in New Zealand) have effective financing costs tied to those rates). And if, perchance, the LSAP programme has kept the exchange rate a bit lower than otherwise, it is hardly lower than it was at the start of the whole Covid period – very different from the typical New Zealand cyclical experience. In short, (sustained) inflation is mostly a monetary phenomenon and monetary policy just hadn’t done that much this time round.

Perhaps as importantly, inflation has undershot the respective targets for a decade or so now, in the context of a very long downward trend in real interest rates. There is less than universal agreement on why those undershoots have happened, in so many countries, but without such agreement it is probably wise to be cautious about suggesting that this time is different, and things will suddenly and starkly turn around from here. At very least, one would need a compelling alternative narrative.

Having said that, there have been a couple of pleasant surprises in recent times. First, the Covid-related slump in economic activity has proved less severe (mostly in duration) than had generally been expected by, say, this time last year when some (including me) were highlighting potential deflationary risks. That rebound is particularly evident in places like New Zealand and Australia that have had little Covid, but is true in most other advanced countries as well where (for example) either the unemployment rate has peaked less than expected or has already fallen back to rates well below those seen, for example, in the last recession. Spare capacity is much less than many had expected.

And, in New Zealand at least, inflation has held up more than most had expected (more, in particular, than the Reserve Bank had expected in successive waves of published forecasts. The Bank does not publish forecasts of core inflation, but as recently as last August they forecast that inflation for the year to March 2021 would be 0.4 per cent (and that it would be the end of next year before inflation got back above 1 per cent). That was the sort of outlook – their outlook – that convinced me that more OCR cuts would have been warranted last year.

As it is, headline CPI inflation for the year to March was 1.5 per cent. But core measures are (much) more important, and one in particular: the Bank’s sectoral core factor model, which attempts to sift out the underlying trends in tradables and non-tradables inflation and combines them into a single measure: a measure not subject to much revision, and one which has been remarkably smooth over the nearly 30 years for which we now have the series – smooth, and (over history) tells a story which makes sense against our understanding of what else was going on in the economy at the time. This is the chart of sectoral core inflation and the midpoint of successive inflation targets.

core inflation apr 21

It is more than 10 years now since this (generally preferred) measure of core inflation has touched the target midpoint (a target itself made explicit from 2012 onwards). With a bit of lag, core inflation started increasing again after the Bank reversed the ill-judged 2014 succession of OCR increases, but by 2019 it was beginning to look as if the (core) inflation rate was levelling-off still a bit below the target midpoint. It was partly against that backdrop that the Reserve Bank (and various other central banks) were cutting official rates in 2019.

The Bank’s forecasts – and my expectations – were that core inflation would fall over the course of the Covid slump and – see above – take some considerable time to get anywhere near 2 per cent. So what was striking (to me anyway) in yesterday’s release was that the sectoral measure stepped up again, reaching 1.9 per cent. That rate was last since (but falling) in the year to March 2010.

As you can, there is a little bit of noise in this series, but when the sectoral factor model measure of core inflation steps up by 0.2 percentage points over two quarters – as had happened this time – the wettest dove has to pay attention.

To be clear, even if this outcome is a surprise, it should be a welcome one. (Core inflation) should really be fluctuating around the 2 per cent midpoint, not paying a brief visit once every decade or so. We should be hoping to see (core) inflation move a bit higher from here – even if the Bank still eschews the Fed’s average inflation targeting approach.

Nonetheless, even if the sectoral factor model is the best indicator, it isn’t the only one. And not all the signs are pointing in the same direction right now. For example, the annual trimmed mean and weighted median measures that SNZ publishes – and the RBA, for example, emphasises a trimmed mean measure – fell back in the latest quarter. The Bank’s (older and noisier) factor model measure is still sitting around 1.7 per cent where it first got back to four years ago. International comparisons of core inflation tend to rely on CPI ex food and energy measures. For New Zealand, that measure dropped back slightly in March, but sits at 2 per cent (annual).

Within the sectoral factor model there is a non-tradables component – itself often seen as the smoothest indicator of core inflation, particularly that relating to domestic pressures (resource pressures and inflation expectations). And that measure has picked up a bit more. On the other, one of the exclusion measures SNZ publishes – excluding government charges and cigarettes and tobacco – now has an inflation rate no higher than it was at the end of 2019 and – at 2.4 per cent – probably too low to really be consistent with core inflation settling at or above 2 per cent (non-tradables inflation should generally be expected to be quite a bit higher than tradables inflation).

I think it is is probably safe to say that core inflation in New Zealand is now back at about 2 per cent. That is very welcome, even if somewhat accidental (given the forecasts that drove RB policy). As it happens, survey measures of inflation expectations are now roughly consistent with that. Expectations tend not to be great forecasts, but when expectations are in line with actuals it probably makes it more likely that – absent some really severe shock – that inflation will hold up at least at the levels.

But where to from here?

Interestingly, the tradables component of the Bank’s sectoral factor model has not increased at all, still at an annual rate of 0.8 per cent. All indications seem to be that supply chain disruptions and associated shortages, increased shipping costs etc will push tradables inflation – here and abroad – higher this year. But it isn’t obvious there is any reason to expect those sorts of increases to be repeated in future – the default assumption surely has to be that shipping, production etc gradually gets back to normal, perhaps with some price falls then.

And if one looks at the government bond market, participants there are still not acting as if they are convinced core inflation is going higher. If anything, rather the opposite. There are four government inflation-indexed bonds on issue, and if we compare the yields on those bonds with the conventional bonds with similar maturities, we find implied expectations over the next 4 and 9 years averaging about 1.6 per cent, and those for the periods out to 2035 and 2040 more like 1.5 per cent. Again, these breakevens – or implied expectations – are not forecasts, but they certainly don’t speak to a market really convinced much higher inflation is coming. One reason – pure speculation – is that with the Covid recession having been less severe than most expected, it isn’t unreasonable to think about the possibility of a more serious conventional recession in the coming years with (a) little having been done to remove the effective lower bound, and (b) public enthusiasm for more government deficits likely to reach limits at some point.

So I guess I remain a bit sceptical that core inflation is likely to move much higher here, even if the Reserve Bank doesn’t change policy settings. Fiscal policy clearly played a big role in supporting consumption last year but we are likely to be moving back into a gradual fiscal consolidation phase over the next few years. And if the unemployment rate is now a lot lower than most expected, it is still not really a levels suggesting aggregate excess demand (for labour, or resources more generally). For the moment too, immigration isn’t going to be providing the impetus to demand, and inflation pressures, that we often expect to see when the economy is doing well (cyclically). And if you believe stories about the demand effects of higher house prices – and I don’t- house price inflation seems set to level off through some mix of regulatory and tax interventions and the exhaustion of the boom (as in numerous previous occasions).

What should it all mean for monetary policy? Since I don’t think the LSAP programme is making much difference to anything that matters – other than lots of handwaving and feeding the narratives of the inflationistas who don’t seem to realise that asset swaps don’t create additional effective demand – I’d be delighted to see the programme canned. But I don’t think doing so would make much sustained difference to anything that matter either. So in a variant of one of the Governor’s cheesy lines, it is probably time for “watch, hope, wait”. The best possible outcome would be a stronger economic rebound, a rise in core inflation, and the opportunity then to start lifting the OCR. But there is no hurry – rather than contrary after a decade of erring on the wrong side, tending to hold unemployment unnecessarily high. And there is little or no risk of expectations – or firm and household behaviour – going crazy if, for example, over the next year or two core inflation were to creep up to 2.3 or 2.4 per cent.

But what of the rest of the world? I’ve tended to tell a story recently that if there really were risks of a marked and worrying acceleration in inflation it would be in the United States, where the political system seems determined to fling borrowed money around in lots of expensive government spending programmes.

But for now, core inflation measures still seem comfortably below 2 per cent (trimmed mean PCE about 1.6 per cent). The Cleveland Fed produces a term structure estimate for inflation expectations, and those numbers are under 2 per cent for the next 28 years or so (below 1.7 per cent for the next 15 years). And if market implied expectations have moved up a lot from the lows last year, the current numbers shouldn’t be even remotely troubling – except perhaps to the Fed which wants the market to believe it will let core inflation run above 2 per cent for quite a while before tightening, partly to balance past undershoots. Here are the implied expectations from the indexed and conventional government bond markets for the second 5 years of a 10 year horizon (ie average inflation 6-10 years hence).


These medium-term implied inflation expectations are barely back to where they were in 2018, let alone where they averaged over the decade from about 2004 to 2014 – for much of which period the Fed Funds rate sat very near zero.

What of the advanced world beyond the US. It is harder to get consistent expectations measures, so this chart is just backward-looking. Across the OECD, core inflation (proxied by CPI inflation ex food and energy) has been falling not rising (these data are to February 2021, all but New Zealand and Australia having monthly data).

OECD core inflation apr 21

Are there other indicators? Sure, and many commodity prices are rising. And markets and economists have been wrong before and will – without knowing when – be wrong again. Perhaps this will be one of those times. Perhaps we’ve all spent too much time learning from the last decade, and forgetting (for example) the unexpected sustained surge in inflation in the 60s and 70s.

But, for now, I struggle to see where the pressures will come from. Productivity growth is weak and business investment demand subdued. Global population growth is slowing (reducing demand for housing and other investment). We aren’t fighting wars, we don’t have fixed exchange rate. And if interest rates – very long-term ones – are low, it isn’t because of central banks, but because of structural features – ill-understood ones – driving the savings/investment (ex ante) balance. For now, the New Zealand story is unexpectedly encouraging – inflation finally looks to be near target – but we should step pretty cautiously before convincing ourselves that the trends of the last 15 or even 30 years are now behind us, or that high headline rates – here and abroad – later this year foreshadow permanently higher inflation (or, much the same thing, higher required interest rates).

Negative rates, and the option of more

Last week the International Monetary Fund released a paper prepared in its Monetary and Capital Markets Department by five researchers (one a former RBNZer). The title? Negative Interest Rates: Taking Stock of the Experience So Far. It isn’t an official IMF view, but it seems unlikely that a paper of this sort would have been published if the senior management of the department were not broadly comfortable with the messages it contains. There is an accessible summary of the paper on the IMF’s blog.

As the authors note, a number of these sorts of survey papers have been done over recent years, but recent is almost always better when (a) the experiments with modestly negative interest rates are really quite recent themselves, and (b) there is a steady flow of new papers attempting to get or other angle of how negative (policy) rates might, or might not, have worked. And with policy interest rates now lower than ever – in New Zealand too – it is not as if the issue has no continuing relevance. Even if we get through this pandemic downturn without any more countries deploying negative policy rates, who knows when the next more-economically-founded downturn would be.

I won’t claim that the paper is an easy read for someone coming new to the issue, but by the standards of such papers much of it is pretty readily accessible, and there is plenty of summary material (arguably to the point of repetitiveness).

There seems to be quite a range of views among central bankers themselves on the potential of (mildly) negative policy rates, even across pairs of economies and financial systems that are otherwise very similar. In New Zealand, this was the latest from the Reserve Bank, in last month’s MPS.

rb neg rates

Just a shame they hadn’t used the previous decade to sort out operational readiness to deploy the tool.

On the other hand, the Reserve Bank of Australia (and apparently especially the Governor) has been really quite dismissive on the possibility of a negative policy rate tool, for reasons that they have never really sought to articulate.

So what do the authors of the IMF paper have to say? These paragraphs are from their Executive Summary

IMF 1a
IMF 2a

It is not without nuance, and as the authors note in the text unpicking the effects is rarely easy, but overall it is a pretty story. It was music to my ears, having been championing the case for having negative rates in the toolkit here, and generally consistent with the (subset of the) papers that I had read and conversations I’d had, but I was still quite pleasantly surprised to see it in an IMF paper, especially perhaps when taken with the final paragraph of the Executive Summary

imf 4

You might not like negative policy rates, but you might not have much choice. I found that conclusion particularly interesting because the authors are more confident than I am that central bank large scale asset purchase operations have had a material and useful macroeconomic stabilisation effect.

I’m not fully persuaded by some of the authors’ stories. For example, they claim the flow-through into corporate deposit rates has been greater than that for household deposit rates because “it is costlier for companies to switch into [physical] cash”. I don’t really buy that argument. You or I might find it easy to hold an extra $200 in our wallets, but storing securely $50000 or more of cash just isn’t that easy, and it is really the conversion of large scale holdings (as distinct from transactions balances) that is at issue here. By contrast, for big investment funds conversion to physical cash would be more feasible if central banks pushed policy rates “too deeply” negative. We don’t actually know how deep is “too deep” here, but as the authors note there has, so far, been no sign of large scale physical cash conversions yet. There has been a hunch that it would be unwise to push beyond about -0.75 per cent, but no central bank has yet been willing to push the point to find out. My own interpretation of why household deposits rates mostly haven’t fallen below zero is some mix of (what the authors report) material increases in fees charged by banks on household deposits, and (perhaps not unrelatedly) a sense that it isn’t worth facing the aggro that might come from charging a negative interest rate on household deposit when, at most, it is a few tens of basis points involved. Threshold effects sometimes matter.

The idea of a “reversal rate” has had some play in the literature and debate on negative rates, including being touted by some bank economists here. This is the idea that a move to a negative policy rate might actually have the paradoxical effect of tightening overall monetary conditions, perhaps by tightening lending margins and reducing the willingness of banks to lend. Generally, the IMF authors are not persuaded that this theoretical possibility has been a real world outcome in the countries (euro-area and Denmark, Japan, Switzerland, and Sweden) that have run negative policy rates. And some evidence has suggested that whatever banks do, corporates sitting on large deposits facing negative rates have been encouraged to increase physical investment (transmission mechanism working as one might hope).

Reflecting on the IMF paper and the wider issue of negative policy rates, three points strike me:

The first is a reminder of just what small changes in rates are being dealt with when researchers try to unpick the effects, and how few changes there are to study. The Swiss National Bank’s policy rate of -0.75 per cent is the lowest anywhere. By contrast, as the IMF researchers note, in studying the effect of cyclical swings in monetary policy we are often dealing with policy rate fluctuations of 500 basis points or more (RBNZ in the last recession -575 basis points), and whereas policy rates used to be adjusted quite often, there just have been many changes in the last decade. Somewhat related to this, one negative rate is not necessarily quite like the other: the various central banks that used the tool have also typically introduced tiering-type regimes to attentuate the effect (especially on returns to core holdings of settlement cash by banks). With a handful of countries, unavoidable selection bias in the choice of those countries, small adjustments and infrequent fluctuations, any conclusions are inevitably going to be provisional.

The second is to note that over the 12 months or so since Covid became an issue, although almost all central banks claim to have done quite a lot with monetary policy (a) no central bank that had not already had negative policy rates has moved to introduce them, and (b) none of the central banks with negative policy rates have cut them (even though all other advanced country central banks have cut their policy rates). I don’t purport to know why that is, and really hope some smart and careful researcher in the area has a paper in the works on the subject. In the case of the already-negative central banks, perhaps it really is that they think they have already reached the effective lower bound (ELB) and that, although cuts so far have been useful and stimulatory, any further cut at all would be too risky, and either ineffective or counterproductive. That might make some sense, although the IMF researchers nicely illustrate the absence of any systematic shift to physical cash thus far (although in New Zealand, coincident with the cut in the OCR to near-zero currency in circulation was 13 per cent higher in January than in January 2020). A year ago I would not have believed an “operational unreadiness” explanation for no further countries moving to use negative rates – given the 10 years or so advance notice they have all had – but the revealed failure of the RBNZ to be ready (even when amenabe to using the tool), and the Bank of England even now, suggests there might be more to this story than I had thought plausible. Another interesting piece of research for someone would be to dig into the experience of the negative rate countries and find out how, and how quickly, they came to have systems that were operationally ready.

The third and final point is related to the first. The greatest extent of negative policy rates is really only playing at the margin. Central banks that have used negative rates appear to have found them useful, and (for example) the IMF survey tends to back up such a view. And yet a decade on, not one central bank (or government – and it is likely to be in effect a joint responsibility) – appears to have taken any steps at all to remove, or sharply reduce/attenuate, the effective lower bounds, by a wedge to preventless the limitless conversion at par from settlement cash balances to physical cash. There is no sign any central bank had done so in the 2010s, and there has been no hint of any fresh urgency in the year since Covid dispelled any wishful thinking that macroeconomic conditions would mean rates could really only rise from where they had got to.

The issue here is not about deciding to cut the policy rate more deeply, but about optionality. If macroeconomic circumstances – weak inflation, probably hand in hand with above-normal unemployment – meant that much more macro policy action was warranted do monetary policymakers have all possible tools at their disposal. And do markets (and firms and households) believe they have? Believe in the efficacy of asset purchase programmes all you like (I don’t, especially when- as in New Zealand – it just comes to swapping one government liability for another) but no one has ever deployed a programme that purports to be as effective as 500 basis points of policy rate cuts, and it would be exceedingly rash to believe such recessions will never happen again. Perhaps the world’s central bankers are now all big fans of fiscal policy – not just as short-term income relief – but (a) even if so, they can’t ensure fiscal policy is used, and they still have macro stabilisation responsibilities, and (b) if they really want to give up on monetary policy they should probably surrender their autonomy and simply become operational branches of finance ministries. It seems negligent to have done nothing about easing an obstacle to using monetary policy that exists only because of a rather arbitrary series of state interventions in the first place (banning private notes, and the innovation that probably would have come with them, while insisting on invariant conversion at par between central bank notes and central bank deposit liabilities).

I’m genuinely puzzled why nothing has been done, either in the quiet times – the idea time to socialise these ideas and new rules and procedures – or in the difficult conditions of the last year. There is no obvious good explanation, leaving either subtle ones (too secret for the public to know) or negligent ones.

As it happens, our Reserve Bank came a bit closer to addressing the issue openly than I’ve seen from others. In a speech given a year ago yesterday – at a time when the Bank was still oblivious to the wave about to break over them, Orr included this in a discussion on tools under consideration

orr 2a

That second sentence was right to the point (and I recall welcoming it at the time). But we’ve heard not a word more from them either, even though only recently (see above) they have reaffirmed their view that a negative OCR has a valuable place in the toolkit. If a modestly negative OCR does, why not the possibility of a deeply negative one? Convince people that you have a credible tool of that sort, and would be willing to act aggressively to deploy it, and you are less likely ever to need it, since expectations will do some of the work for you. If you fail to do so, you risk recessions lingering longer than they need to, something inconsistent with the thrust of inflation targeting whether in its 1989/90 articulations or this government’s (cosmetically different) new one.

Not that good really

The Reserve Bank’s Monetary Policy Committee yesterday ambled back from their extended summer break and delivered the first monetary policy communication for the year – no speeches, no sign of any substantive interviews, but we did finally get this OCR review and Monetary Policy Statement. Having given themselves 3.5 months one might have hoped for something very good and insightful – there has, after all, been a lot happening, and the Bank has the largest concentration of macroeconomists anywhere in the country, generously funded at taxpayers’ expense.

I didn’t have that much trouble with the policy bottom line. If they were never going to cut the OCR and scrap the LSAP (as I suggested on Monday would have been warranted), at least they weren’t carried away with the “inflation risks mounting” sentiment that seems to be sweeping markets. In fact, I rather liked Orr’s response to a question in which he reminded listeners that central banks – the Reserve Bank more than most – had been too ready after the 2008/09 recession to want to raise interest rates and get back towards “normal” (a favoured line of his predecessor Graeme Wheeler), nicely and rightly adding that no one now knows what is “normal”, at least when it comes to interest rates. If medium-term forecasting is a mug’s game (on which more below), the Governor/MPC look to be right in suggesting that OCR increases are unlikely to be warranted any time soon.

On policy, there was an interesting framing in which the MPC said that they would keep policy “stimulatory” “until it is confident that consumer price inflation will be sustained at the 2 per cent per annum target midpoint, and that employment is at or above its maximum sustainable level. One might argue that that framing – especially that “and” – was (a) ultra vires (since the Remit subordinates the employment dimension) and/or (b) not entirely consistent (if employment is above maximum sustainable levels (as estimated) it is less likely that the Bank will be able to satisfy itself that inflation will remain “at” 2 per cent. Perhaps we should read it a little dovishly, but it remains a little disconcerting that after all these years of undershooting the target midpoint, the Bank is still giving nothing to ideas like the average inflation targeting the Federal Reserve has adopted for the time being. “At or above 2 per cent” might have been a preferable formula, and if that required a change in the Remit well… we discovered subsequently the Minister was already in that game. And it should remain a little troubling that with all the stimulus the Bank claims to be throwing at the situation, on their forecasts it is still 2.5 years until core inflation gets back to 2 per cent. Not much sign of the least-regrets framework really being acted upon, as distinct from cited.

In that context, one of the oddities about the Bank’s forecasts is that 2-3 years hence the Bank tells us it thinks there will be a positive output gap of 1.4 per cent (output running ahead of potential) and yet they also think the unemployment rate by then will be no lower than 4.6 per cent. On the face of it, that suggests they think the NAIRU-equivalent unemployment rate will by then be in excess of 5 per cent. Perhaps they do (perhaps those higher minimum wages really do cost jobs?), perhaps they don’t, but we don’t know because the Bank doesn’t explain.

Which is another of the oddities of the document. I’m not a big fan of medium-term macroeconomic forecasting, and was openly sceptical of its value for years when I was inside the Bank (it is too long ago to recall whether I was so sceptical when I ran the forecasting function) but the Bank purports to believe. A lot of effort has typically gone into doing and writing up the forecasts. And if you go to the formulaic pages at the front of the MPS, we are still told of a threefold approach to policy.


Which seems to put a lot of emphasis not on the conjuncture (current situation) but on the outlook (projections, forecasts surely?). And yet when we got to chapter 5 of the MPS – devoted to the outlook – there is much less than a full page of text, and then a two page bullet point table which contains no economic analysis at all, and which doesn’t appear to add anything beyond the numbers in the table. This appears to be a new approach – there was much more text in November – and it isn’t obviously an improvement. We have the Bank’s numbers, but almost nothing at all about the thinking, analysis, and research that lies behind them.

Perhaps – given my scepticism on medium-term forecasting – that might be more pardonable if there was lots of really high quality analysis of the current and recent past situation. In times like the present, perhaps one really can’t improve on a decent understanding of where we are now, and what we are learning from incoming data. But there isn’t anything very serious on that score either. For example, there is no sustained analysis of the housing market – which seems all the more extraordinary in light of the Minister’s intervention this morning – no sign that the Bank has done serious work on unpicking the various factors driving it, or influencing their quite optimistic forecasts. There is, for example, reliance on a story about returning New Zealanders last year. Perhaps it is a big part of the story, but argumentation is never developed, alternative hypotheses are never tested, and there is barely any mention of the rather large reduction in the number of non-citizens arriving (as it happens, it also isn’t that clear what they are assuming about net migrations as and when borders reopen).

Similarly I didn’t see any serious analysis of why the Bank thought it had been so surprised about recent developments. Of course, they weren’t alone in that surprise, but they set monetary policy, and they have all those resources at their disposal. Was it that monetary policy had been surprisingly potent – whether OCR or LSAP? Was it that resources and consumption were just much more flexible than they thought? Was it housing? (but if so, an authoritative analysis of the housing market is all the more important surely?) I don’t know the answers, and am not pushing particular stories, but shouldn’t we expect fresh and authoritative insights from the Bank? But there is nothing there – and nothing in the comments of the Governor and his senior staff at the press conference yesterday. There are lists, there are charts (some moderately interesting), but little or no insight or analysis – and there have been no speeches etc offering it either. It is the weakness of the institution – they might get some individual calls right, but one can’t have any confidence that they really know what they are doing and deserve deference for their insights, research and authoritative insights and judgements. Instead we get things like populist digs at banks for not, in the Governor’s view, having lowered their lending rates “enough’ – as if he was either a politician or perhaps a competition regulator. Oh, and in a document of not much more than 30 pages of text, devoid of much serious analysis on core issues, there is three pages devoted to one of the Governor’s pet playthings – the “Maori economy”. Can we expect one on the Catholic economy, the lefthanders’ economy, or the Labour-voters economy next? Each would be equally irrelevant to the Bank’s macroeconomic monetary policy – one economy, one instrument – statutory focus.

But the MPS was yesterday, and then this morning – safely after the FEC had had its chance to question the Bank – we had the real monetary policy initiative of the week, with the Minister of Finance announcing that he had changed the Remit to which the Bank works. He can do that, and had signalled back in November that he might make such a change. The new Remit is here.

It is a pretty shoddy affair on the Minister’s part. The new Remit was dated 22 February – Monday. Presumably the Bank was well aware of it. But the Minister kept it quiet until today, and the Governor made no mention of it yesterday – when the journalists had their quarterly chance to grill the Governor on monetary policy topics (next time not until late May). From a government that used to talk of being the most open and transparent ever, from a central bank that likes to claim it is highly transparent, it was like a sick joke, designed to avoid serious scrutiny and have all the reportage based on press releases – the Minister’s puff piece, and the Governor’s fluff.

It was typical Robertson (and perhaps Orr too). Robertson has never shown any sign of being serious about better monetary policy or a better institution (if he had, for example, he wouldn’t have banned people with an active research interest in monetary policy from being considered for the Committee) but he is very assiduous about having it look as if he is making a difference. That remains the best way to understand the first round of Reserve Bank reforms, and is the best way to see today’s announcement. The government is under pressure for doing little or nothing on housing. The Minister knows that monetary policy has little or nothing to do with the New Zealand housing market policy disaster, but he needs to look as if he is doing something, win a news cycle or two, and perhaps even fend off a few of his left-wing critics who do blame the Bank.

If you doubt that interpretation, look at the specific changes the Minister has made. At the front of the document there is woolly political paragraph about the government’s wider economic goals. It has no binding effect on anyone, but to that long list Robertson has added

An effective functioning housing market is a critical component of a sustainable and inclusive economy and promotes the maintenance of a sound and efficient financial system.

Well maybe, but even if you, I, the Governor or the MPC agreed it is simply a statement of faith, and anyway the Reserve Bank – especially with its monetary policy hat on – has no impact in delivering “an effective functioning housing market”.

And then later in the document the Minister has added some words. The first ones are in a section that does bind the Bank. There is a list of things that, in pursuing price stability and supporting maximum sustainable employment the Bank is required to do. There is longstanding stuff about avoiding “unnecessary instability in output, interest rates, and the exchange rate”, about looking through one-off price shocks, and having regard to “the efficiency and soundness of the financial system”. To that list the Minister has added this

assess the effect of its monetary policy decisions on the Government’s policy set out in subclause (3

and that “Government’s policy”? It reads thus

The Government’s policy is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.

How wet is that? So the MPC is only required to “assess” the impact of its decisions on the government policy, not act in pursuit of that “government policy” (which might well be ultra vires anyway). A Reserve Bank action will no impact on a government policy: government policy will still be what it will be. At most that is another paragraph in each MPS. And quite how monetary policy decisions will affect the mix between the despised “investors” and other potential buyers will be a mystery to almost everyone (the Bank has financial regulatory interventions that it can use – although borders on the ultra vires to do so – that might have an effect but…..this is monetary policy.

It was a feeble effort. On the one hand we should be glad that the Minister sees sense and doesn’t ask the Bank to pursue house prices – doing so would simply push unemployment higher than it needs to be – but much better if he’d simply done nothing on monetary policy – and he and his colleagues concentrated on the real issues – rather than this limp effort in performative display, stage-managed to minimise the risk of serious immediate scrutiny. The Governor was, I guess, much too diplomatic to point out the emptiness of today’s announcement, but how he’d have answered faced with a sceptical press conference would have been interesting. And how MPC colleagues might have answered if they were ever allowed to speak openly, if appointments had not simply been based on who met certain political and gender criteria, who wouldn’t ever make life awkward for the Governor.

(Oh, and if the Minister and Governor really weren’t trying to avoid scrutiny, the obvious thing would have been to have released the Reserve Bank advice, the Treasury advice, and any Cabinet paper when the new Remit was announced. Of course they didn’t.)

Monetary policy

Having taken their long summer break – not heard from since 11 November – the Reserve Bank’s Monetary Policy Committee will be out with their Monetary Policy Statement on Wednesday. Much has changed in the economic data and indicators, here and abroad, since then, and it will be interesting to see what the Governor and has committee have made of it all. There are some genuine surprises and puzzles that the Committee should have been grappling with – and most other macro economists and commentators too, but the rest of us don’t get to set monetary policy. And if the strength of the economic rebound is a surprise – and it would appear to have been to the Bank too – how resilient is that rebound likely to prove, and under what conditions?

I’m somewhat sceptical of the idea of a resilient rebound this year – and with more than a few questions/puzzles about quite which data we can really count on at present – but without a compelling explanation for last year, one has to be even more hesitant than usual about backing a view about the future (macro forecasting is mostly a mug’s game anyway).

My own approach to monetary policy would probably be the one – “least regrets” – the Bank has repeatedly articulated over the last couple of years, if rarely followed in practice. That is especially so because the last year has made me more sceptical than I was about attempting to use fiscal policy for macro stabilisation (as distinct, say, from income relief amid a lockdown). Interest rates are the prices that balance savings and investment intentions, and monetary policy is about allowing interest rates to do that job.

And so even if the level of economic activity – even in per capita terms – is now back to something like it was at the start of last year, we still have

  • a central bank that has done nothing to reduce the (true) effective floor on the nominal OCR (even if they have very belatedly ensured that banks can cope with modestly negative rate),
  • core inflation that is still (a little) below the midpoint of the target range, not having been at or above that midpoint for the best part of a decade),
  • inflation expectations (surveys and market prices) that are still typically below the target midpoint, often by quite a long way (and this is so even though there has been quite a –  welcome –  lift in recent months),
  • the unemployment rate (inevitably measured less precisely than usual) is still non-trivially above reasonable guesses at where a NAIRU might be,
  • most other countries’ economies are doing less well cyclically than New Zealand’s and if vaccination programmes are well underway in a few of them, anything like normality still seems quite a way away, 
  • there is a great deal of uncertainty (inescapable, unavoidable) about the environment in which firms and households will be operating, and uncertainty tends not to encourage either consumption or investment spending, and
  • if the US is having another fiscal splurge, more generally across advanced countries the pressure in the next year or two is likely to be towards fiscal consolidation –  not necessarily dramatically so, but certainly in contrast to last year.  There isn’t much sign New Zealand will be any exception to that (nor, in my view, should it).

And then there is the wider backdrop. Even if we recover from this unusual Covid recession more readily than many had expected, the issue that has increasingly dogged monetary policy over the last decade has not gone away: nominal policy interest rates in more and more countries (now including former high interest rate countries New Zealand and Australia) are now near zero leaving rather limited monetary policy capacity when the next serious recession – grounded in economic developments not infection ones – comes along. That might be 10 years away, but it might be only a handful. The best thing monetary policy can do to help ensure there is some policy leeway next time is to err strongly on the easing side at present, generating inflation (and inflation expectation) outcomes that are – for a change – in the upper part of the target range. The Bank could articulate something like the Fed’s average inflation targeting approach – or, since the Minister is the one supposed to set the target, the Minister could tell them to – but a decent start would be to start acting as if they would be totally comfortable if, by chance, core inflation averaged say 2.3-2.5 per cent over the next five years. That doesn’t require actively targeting such numbers, but it does require recognising that central banks (including our own) have consistently over-forecast inflation over the last decade, and still don’t adequately understand why they’ve made that mistake. So by being actively willing to embrace higher inflation outcomes, perhaps the Bank and the MPC might just give themselves a better chance of delivering outcomes around 2 per cent – what successive ministers of finance have asked them to do.

If it were me, then, I would still be cutting the OCR, perhaps to zero this time. It would add a bit more macroeconomic stimulus, and would also be more realistic – since we don’t know the future – than idle pledges to keep the OCR where it is for some arbitrary length of time (recall that their last, hawkish as it turned out, arbitrary commitment only expires next month). And I would continue to express a willingness to take the OCR negative – and not a grudging willingness, but a genuine “do what it takes” approach to getting the economy back to full employment and inflation back to target.

And what of the Large Asset Purchase programme? If it were me, I would discontinue it now. That isn’t inconsistent with my macro stance (see above) because as regular readers know I’ve long been of the view that the LSAP was not making much macro difference at all (even if it may, at the margin, have helped a little in stabilising bond markets in the couple of weeks of global flurry last March), while it continues to (a) act as distraction (enabling the Bank to look and sound as if it is doing more than it is, and (b) has led some people to believe that somehow monetary policy, notably the LSAP programme, is greatly exacerbating that unnatural disaster of the rigged New Zealand housing market. Scrap the LSAP and nothing of substance will change around the housing market – access to finance, access to (use) land, supply of finance, demand, or even the shorter-term interest rates that are relevant to most mortgage borrowers. (And, of course, more generally the unnatural disaster has almost nothing to do with monetary policy – and even for those who want to “blame” interest rates, bear in mind that very long-term market rates, that central banks have little direct hold over most of the time, have been falling for decades.)

Now I don’t for a moment suppose that the Bank will do anything of that sort, on any of what I’m suggesting about monetary policy. But I hope they do give us some sort of serious framework outlining the sorts of specific factors that might eventually lead them to discontinue the LSAP. It is, for example, hard to see how they could justify continuing it if (a) they now believe banks can adequately cope with negative interest rates, and (b) if they get to a point where they think the risks are no longer skewed to the downside.

On such things, I’ve been reading over the last week a new book by the British economist Jonathan Ashworth on the experience this century with central bank asset purchase programmes (it is 20 years next months since the Bank of Japan first launched its quantitative easing). Quantitative Easing: The Great Central Bank Experiment was published last year and clearly was completed on the very eve of Covid – a couple of 2020 references, but no mention of the Covid recessions/interventions at all. It is a really nice summary treatment and documentary record of the activities in this area of the Fed, the Bank of England, the ECB, and the Bank of Japan, up to and including the Fed’s partial withdrawal from QE, as it finally raised interest rates after 2015 and wound back the size of its balance sheet. Although the publisher – launching this new series of books on aspects of the global financial system – describes the approach of the series as “resolutely heterodox”, in fact the book is strikingly orthodox. It is, therefore, quite a nice summary of the likely way the Reserve Bank and The Treasury were seeing the possibilities, and limitations, of quantitative easing when they were advising the government at the start of last year. It is also a good single point of reference if, like me, memories of some of these programmes grow somewhat hazy over time. And for anyone wanting a good introduction it is a fairly accessible read.

The orthodox view tends to be that asset purchase programmes have had some, perhaps significant, macroeconomic benefits. The case is probably strongest in the midst of the 2008/09 crisis when both the UK and US launched such programmes (although with important differences between those programmes) although Ashworth seems to favour interpretations in which later programmes have also had useful effects. I’m more sceptical, for a variety of reasons. Much of the work in this area rests of event studies around the announcement of programmes, and so it is a shame that Ashworth does not engage with (for example) the published work of former senior St Louis Fed researcher Dan Thornton who has critically reviewed claims in that are (see, for example, this journal article, and this policy piece). Ashworth rightly highlights how wrong were the people who claimed a decade ago that the asset purchase programmes would lead to a huge upsurge of inflation (much the same claims are made in some quarters on the right about the latest asset purchase programmes) but doesn’t really probe deeply questions as to whether a large scale asset swap can really make very much sustained macro difference. He doesn’t, for example, engage with the idea that things might be different if a central bank was buying bonds yielding, say, 10 per cent, and paying zero interest on settlement cash balances (as would once have been the norm) than if the central bank is purchasing assets yielding under 1 per cent (sometimes under zero) and paying the full policy rate on the resulting settlement cash balances. And although he usefully looks at the Fed’s balance sheet wind-down pre-Covid, his conclusion that that policy choice had little or no macro impact doesn’t seem to lead him to reflect afresh on whether the earlier policy interventions really had as much sustained effect as many central bankers prefer to believe. (One of my own sceptical arguments over they ears has been that there was little sign that bond yields had fallen further relative to policy rates in countries that used the LSAP tool – say the US or UK – than they had in countries that did not – say New Zealand or Australia.)

One point Ashworth does usefully highlight – and which I hope the RB will touch on on Wednesday – is the stock vs flow distinction. If QE has an effect, it is from the transactions in the market at the time (the flow) or from the accumulated withdrawal of bonds from the market (a stock effect). He notes that the literature tends to favour the stock story. If that is correct – and if QE has much effect at all – then, for example, the Reserve Bank could discontinue the LSAP now and continue to assert that the stock of bonds they had purchased was continuing to have a material stimulatory effect.

And just in case you think that LSAP-scepticism might just be some Reddell idiosyncrasy, I can leave you with a couple of quotes, The first is from the body of the book, from Paul Krugman, quoted in 2015 observing of the unconventional monetary policy tools “the bad stuff [presumably inflation risks] unpersuasive, the good stuff maybe, but not really compelling, this has just not turned out to be the game changing policy too that people had expected”. The other quote is from the Foreword to the book by the eminent academic and former central banker, Charles Goodhart (also a former colleague of Ashworth’s). Goodhart clearly likes the book, and commends it to readers, but notes that his own view that beyond intense crisis periods – in which bond purchases can respond to liquidity and market dysfunction stresses – the direct effect on the real economy via interest rates [ and recall that Orr claims the LSAP works by affecting interest rates], either actual or expected, and on the portfolio balance, was of second-order importance. QE2, QE3 and QE Infinity are relatively toothless”.

As I’ve noted previously when you have a tool that largely involves swapping one lots of (longer-term) government liabilities for another lot of (shorter-term) government liabilities – both paying low but market interest rates – and when your swap doesn’t even displace many existing holders of the long-term assets, it is inherently unlikely that you could use such a tool to generate large or sustained macro effects. My best read of the experience to date – abroad, nicely described in the book, or at home – is that we’ve seen just what we should expect, but with lots of central bank handwaving (the need to be seen to be doing something) that has distracted people into thinking that the tool is much more powerful – for good or ill – than it actually is.

Monetary policy in 2020

On Saturday I did a guest lecture to the Master of Applied Finance course at Victoria University. Martien Lubberink, who runs the course, invited me along to talk to the students about the Reserve Bank’s monetary policy this year (as it happens, most years for the best part of two decades I used to do a lecture to this same course articulating and championing the monetary policy framework and the Bank’s conduct of policy).

There wasn’t a great deal in the lecture that hasn’t already been covered in one or (many) more posts over the course of the year, but if anyone is interested here are the slides I used

Activity over substance VUW presentation 12 Dec 2020

and this is the story I was trying to tell

Notes for VUW MAF lecture on 2020 mon pol 12 Dec 2020

For the most part, I tried to look at what the Bank has, and hasn’t, done on their own terms. I didn’t, for example, spend lots of time on whether negative OCRs would “work”, but rather took as given the Bank’s repeatedly stated view that they would. I didn’t challenge the “least regrets” approach they have claimed, since the second half of last year, to be guiding them, but looked at how they had done relative to that worthy aspiration. I took for granted their embrace of the notion that in downturns when both inflation forecasts undershoot and unemployment forecasts overshoot aggressive monetary action is warranted. And against the backdrop of all that sort of thing I suggested that the year was best characterised as one of lots of activity, and rhetoric, and not a great deal of monetary policy substance.

For example, I included these two indicative charts comparing (real) interest rate and (nominal) exchange rates this year and in each of the three previous recessions since inflation targeting was adopted.

activity over substance

Whatever the impact of the LSAP and the funding for lending programme etc, the bottom line remains that key financial market prices just haven’t moved very much (and that is another area where I take as given – but also agree with the Bank – that to the extent those programmes work they do so largely by altering interest and exchange rates).

I ended the lecture with some thoughts on how we should evaluate the Bank’s monetary policy performance this year. From my notes

How should we evaluate the Bank’s performance?

We always have to be careful, when evaluating government agencies, not to hold them to unreasonable standards.  In this talk I’ve tried to ensure that I use either information that was available to them when they made decisions, their own rhetoric and arguments, or common international central banking practices and standards.   We can’t blame the RB, for example, for not pre-emptively easing a year ago in anticipation of a pandemic no one –  no central banker anyway –  could reasonably know about.

But we, and should, criticise them for:

  • The failure to recognise and respond to the emerging risks early (monetary policy works with a lag, risks around being near the lower bound were well known),
  • The failure, having decided that the negative OCR was a preferred option, to have ensured the bulk of the system was operationally ready (almost inexcusable, and has meant we have had monetary conditions tighter than otherwise for most of the year,
  • The failure to operate as if “least regrets” was actually guiding policy – the evidence for this not being my independent analysis, but their own numbers,
  • Falling back on exuberant spin regarding the impact of the LSAP, when realistically the effective impact is likely to have been small,
  • Opening the way to the “$100bn money printing” rhetoric by adopting LSAP rather than a mod-point on the yield curve target (as the RBA initially did, and even the LSAP the RBA is now doing is much smaller relative to the size of the economy),
  • Allowing the (second-best) sensible FFL instrument to also be framed as some dangerous money printing exercise,
  • Lack of serious transparency – whether the utter refusal to publish background analysis/research behind the mon policy choices/instruments, even in extremely unsettled times and when the rest of govt was being proactively transparent, or the continued invisibility and silence of the non-executive members of the MPC, and
  • The lack of effective communications and framing. There have been few speeches all year, hardly any published research, nothing from the non-exec MPC members.  Instead, they’ve largely left the framing of issues to critics –  notably the ones who think the Bank has done too much and is to blame either for house price inflation and some looming general inflation.  There has been nothing authoritative from the Bank, and they seem constantly to have been running to catch up.

    It has been a poor performance, that reflects poorly on all those involved: the Governor, his senior staff, the invisible non-exec MPC members, the Board (paid to hold management to account) and the Minister with responsibility for management and the Board.

    Of course, it is fair to ask how much difference a better monetary policy –  substance and presentation –  might have made.  By now, perhaps not a lot substantively – the mon pol lags are longer –  but into next year it would have helped lay the foundations for a strong recovery, a lift in inflation, and a rapid return to full employment (we can’t afford the 10 years it took after 2007).  And, agree with them or not, the RB would stand higher in informed opinion, and if we value the idea of an operationally independent central bank, that would have to have been a good thing.  It would truly have been a least regrets strategy.

At the end of the lecture, we had some time for questions. Perhaps the best question was the one I could not give a compelling answer to: why – given their projections, given their avowed “least regrets” approach – has the Bank and MPC not been willing to do more?

I had noted that there were similar issues with central banks in a number of other countries, and indeed that it was striking how relatively little monetary policy had done in this downturn and period of greatly-heightened uncertainty. You can see it in, for example, the published projections of the Reserve Bank of Australia, the ECB, and probably others too – where for several years to come not only is inflation expected to be below target, but unemployment is above general estimates of the respective NAIRUs. As our Governor notes, that is a combination that points in the direction of a lot of monetary policy support.

(As just one example of what is going on elsewhere, the ECB released its latest projections late last week.

ECB inflation

Three years out inflation is still barely back to 1.5 per cent, compared with a target of just under 2 per cent. In these same projections, the unemployment rate rises further from here.)

Central banks could do more to boost the recovery in activity and employment. The quiescent inflation numbers – their own projections – tell us that. In fact, those projections (and market and survey expectations) are best seen as a constraint limiting how much central banks can do; a constraint that when inflation projections are below target should be thought of as a non-binding constraint (especially when central banks around the world have had an upward bias to their inflation forecasts for the last decade).

So why don’t they do more? I don’t know. They don’t say – especially not our Reserve Bank which talks one set of rhetoric (often quite good rhetoric) and acts inconsistently with that rhetoric. Perhaps there is something in the story that active-government left-liberal Governor doesn’t want to use monetary policy because he wants to put pressure on the government to run bigger deficits and further increase public spending. I hope that isn’t a part of the story – it would be profoundly inconsistent with our democratic institutions of government for a non-elected official (and his lackeys on the MPC) to refuse to do their job simply to try to advance their personal political preferences in other areas. Perhaps they don’t believe the rhetoric (they themselves use) and doubt that monetary policy can do much more good in stabilising the economy. Perhaps there is some secure-public-employee indifference to the scandal of prolonged and unnecessarily high unemployment (which never affects senior central bankers, and probably rarely their children): it did, after all, take 10 long years after 2007 to get unemployment in New Zealand back down again. Perhaps there is some embarrassment that with all those years of advance notice they didn’t get their act together and ensure that banks were operationally ready for negative OCRs? Perhaps, globally, there is some discomfort that with all those years advance notice – most having got to the lower bound in the last recession – nothing (repeat nothing) has been done anywhere to make the lower bound less binding, and enable the sorts of deeply negative interest rates that (for example) former IMF chief economist Ken Rogoff has called for.

Sure, it is easy for people to talk about all the fiscal stimulus that has been provided instead of monetary policy. But those published central bank forecasts – here or in other countries – capture all those effects. It is the job of monetary policy to estimate all the other effects and then, if the inflation outlook is below target and the unemployment outlook is above NAIRU-type estimates, to do more, to do what it takes. with monetary policy. That is what we have discretionary monetary policy for. (There are, of course, hard cases where the inflation and unemployment strands aren’t aligned, but as our own Governor has repeatedly pointed out this year, this isn’t one of those times.)

So, I really don’t know the answer to the student’s question. But I should (as should anyone who follows central banks closely), because they should be telling us. Instead, we’ve had a year of few speeches, no visibility (still) for the non-executive MPC members, little or no published research, a refusal to release background documents and analysis, and little or no attempt to articulate and defend a robust framework. 10 days or so ago, for example, the Governor gave a speech to an Australian audience on New Zealand monetary policy this year. As far it went, and by Orr’s standards, it wasn’t a bad speech but it addressed none of these questions. That isn’t good enough, and reflects poorly on everyone involved – the Governor, the MPC, the Board supposed to hold them to account, and the Minister of Finance with overall responsibility for the Bank, for monetary policy, and for economic performance more broadly.

There has been a lot of rhetoric, a lot of busy-work, but not a lot of monetary policy doing what it is there for, and not much transparency and accountability either.

Robertson playing distraction

On Tuesday afternoon we learned that the Minister of Finance had written to the Governor of the Reserve Bank about housing and monetary policy. At his press conference yesterday, the Governor told us that the first thing he knew about it was on Monday, suggesting that the government had become worried over the weekend that it was on the political backfoot on housing and felt a need to be seen to be doing something/anything, to change the headlines for a day or two at least.

There wasn’t much to the Minister’s press statement. Perhaps it might even have seemed not-unreasonable if he’d come into office for the first time just a few days ago, but he’s been Minister of Finance for three years, and the housing disaster has just got steadily worse over that time. Little or nothing useful has happened in that time to do anything other than paper over a few symptoms of the problem. And no one believes any agenda the government has is likely to markedly change things for the better: if they did, expectations would already be shaping behaviour and land/house prices would already be falling. Why would one believe it when the Prime Minister refuses to talk in terms of materially lower house prices, and even the Minister of Finance yesterday could only talk about wanting “a sustained period of moderation in house prices” – ie enough to get the story of the front pages, not to actually fix the problem? That makes them no better than their National predecessors.

And so he made a bid to play distraction, writing to the Governor and suggesting that he (the Minister) might change the Remit the Monetary Policy Committee operates under. The Minister can make such changes himself (he does not need the Bank’s consent), but must seek comment from the Bank first.

It was a limp suggestion, as the Minister must have known when he wrote the letter (and as The Treasury would almost certainly advised him, if he asked for advice from them). In the Remit, consistent with the Act, the MPC is required to use monetary policy to keep inflation near 2 per cent, and consistent with that to do what it can to support “maximum sustainable employment” (in practical terms, low unemployment). And then there is this


The Minister suggested in his letter that he might like to add “and house prices” to the end of the worthy grab-bag phrase in b(ii).

b(ii) has been in the Bank’s monetary policy mandate (the old Policy Targets Agreements –  which I’d link to, but the Bank seems to have removed them from their website) since the end of 1999.    It was inserted when Labour became government that year and the new Minister of Finance, Michael Cullen, wanted some product differentiation.  The Bank had had a bad run over the previous parliamentary term, including the period when it ran things using a Monetary Conditions Index operating guideline, which led to us actively inducing a wildly unnecessary degree of variability in short-term interest rates.  Cullen had also, for some years, been somewhat exercised about the cyclical variability of the exchange rate.

It was cleverly-crafted wording.  Don Brash agreed to some new words that sounded worthy –  who, after all, wants “unnecessary” variability in anything – but which really changed nothing at all.  Better (or worse) still, no one has ever known quite what it meant, or if it meant anything at all beyond what was already implicit in a medium-term approach to inflation targeting (looking through short-term price fluctuations –  per b(iii) now –  had always been integral to the way we’d run thing).  A lot of time and energy was spent trying to articulate what it might mean –  the Bank’s Board were particularly exercised, since they were supposed to hold the Governor to account, and it wasn’t clear how, if it all, b(ii) changed anything.  For practical purposes, in all the years I sat on the OCR Advisory Committee, with b(ii) as part of the mandate we were advising against, I’m not convinced it ever made any material difference to any specific OCR decision.   If the Governor didn’t want to tighten much anyway, it was sometimes a convenient reference point –  wanting to avoid “unnecessary instability” in the exchange rate –  but a more hawkish Governor, or a more accurate set of forecasts, might just as easily have determined that any resulting pressure on the exchange rate, while perhaps a little regrettable, was nonetheless, “necessary”.    And then there were the tensions –  avoiding a bit more upward pressure on the exchange rate might actually contribute to increasing the variability in output, and so on.  

The clause was, and is, largely meaningless in any substantive sense.  From a purely substantive perspective I’ve argued for some years that it should simply have been dropped, but the fact that it lives on is a reminder that documents grow not necessarily because the substance requires it, but because there is a political itch to scratch. 

So Grant Robertson’s suggestion that he might change the Remit to add “and house prices”  to b(ii) should be seen in exactly that light. It is about scratching political itches – and distracting from the government’s own failures on housing –  not about substance.     We know this also because the Minister was at pains to reassure people that he wasn’t proposing to change the operational objectives the MPC is required to pursue.   If not, then adding “and house prices” is really no more than getting the MPC to add another few lines to the occasional MPS, to imply that they had paid ritual obeisance.  It might do no harm, but it will do no substantive good either.

But it won Robertson quite a few headlines, and even got the markets excited for a while, temporarily prompting the sort of lift in the exchange rate that might otherwise appear appear out of step with the government’s alleged desire to promote investment in more “productive assets”. 

But if there was anything real to it –  if the aim was actually to make the MPC set monetary policy differently (tighter at present) –  it would, of course, have to have come at the cost of a more sluggish recovery, lower than target inflation, and cyclical unemployment higher than necessary.  Which would have seemed very odd coming from a Minister of Finance who had explicitly introduced to the Act –  what was always implicit –  the cyclical unemployment dimension just a couple of years ago, complete with reminders of the importance his Labour forebears –  notably Peter Fraser –  had placed on full employment.    (I suppose, charitably, it could have involved some more fiscal stimulus to offset less monetary stimulus, but if the Minister had been serious about that he could do it anyway – the RB sets monetary policy in the light of government fiscal choices whatever they are.)

But of course it wasn’t serious. It was political theatre, and distraction, including an attempt to distance himself from monetary policy policy that he had explicitly authorised.  Thus he claims 

mof letter

But as the Minister knows very well, not only was the Bank well advanced in thinking about unconventional monetary policy options by then – they’d published a whole Bulletin article about it in May 2018 – and much of the rest of the world had been using them for some years, but that the LSAP programme (the one actually in effect this year) has been inauguarated with the explicit and repeated consent of the Minister of Finance himself (through the guarantees he has provided to the Bank). Unconventional monetary policy is, in any case, yet another ministerial distraction, since no supposes that whatever contribution monetary policy might have made to this year’s house price developments, it would have materially different if the Minister had ensured that the Bank had its act together in ways that meant that they used a negative OCR this year.

Anyway, the Minister’s letter prompted a quick response from the Bank. Perhaps some wonder if that was necessary – these things could be dealt with to a greater extent in private – but I’m with the Governor on this one. It was the Minister who chose to issue his letter the afternoon before the Bank’s long-scheduled FSR press conference. The Bank had no effective choice but to respond, and better to put things in writing than just rely on throwaway comments at a press conference.

I thought the Governor’s letter was mostly a fairly sensible and moderate holding response. He promised to come back to the Minister with more considered thoughts on the suggested addition to b(ii). There were a couple of bits that could be read more pointedly. For example, the Governor noted that

We welcome the opportunity to contribute to your work programme aimed at improving housing affordability. As I’ve said publicly on many occasions, monetary and financial regulatory policy alone cannot address this challenge. There are many long-term, structural issues at play.

The Bank had, in fact, had some nice lines to that effect in its Monetary Policy Statement just a couple of weeks ago

RB on housing

This is a government failure, not a central bank one. But I guess I wouldn’t expect any central bank Governor to be quite that pointed in public.

Several have also noted that the Governor pointed out that the Bank already considers house prices in setting monetary policy.

I can assure you that the MPC, in making its decisions, gives consideration to the potential impact of monetary policy on asset prices, including house prices. These are important transmission channels that affect employment and inflation. Housing market related prices are
also included in the Consumer Price Index, for example rents, rates, construction costs, and housing transaction costs.

But actually that was a bit cheeky. On those terms, at times like these the Bank positively welcomes higher house price inflation because of the beneficial spillovers they think that leads to in raising CPI inflation. Recall just a few weeks ago their chief economist was actively welcoming higher house prices, distinctly averse to falling prices.

Out of that first round, I’d suggest that the Governor came out ahead on points. The Minister got his headlines – lots of them in some media – but the Governor gave no hint of believing that there was likely to be anything of real substance there.

But the Governor must have over-reached yesterday. At the FSR press conference he expansively declared his pleasure that the Bank has been invited to share its expertise in advising on the wider issues of supply and affordability. In an interview with Stuff – now the frontpage story in the Dom-Post – Orr went further, talking about the tax advice they might also offer. It wasn’t clear what expertise the Governor thought the Bank had in these areas – there is nothing in their research publications or speeches in recent years that suggests any – but I guess that doesn’t often deter the Governor.

But all that talk can’t have gone down well with the Minister, as the newsroompro newsletter this morning includes this

milnes rb


All seems not to be sweetness and light between the Governor and the Minister. But then they deserve each other really. Robertson was engaged in a transparent attempt to distract briefly from the three years of failure of his own government, writing to the Reserve Bank – sure to get headlines – rather than putting the hard word on his own boss and his ministerial colleagues. And Orr, who surely knows there is nothing there and how empty b(ii) really is – and who genuinely seems to think monetary policy should be focused on boosting aggregate demand in ways that lift inflation and employment, can’t help himself in openly trying to embrace a much wider role as adviser on all manner of things that really have nothing much to do with the Bank. Meanwhile, through this period we have had precisely no serious speeches or research papers on monetary policy, we have a central bank that fell back on LSAP partly because it didn’t think to do the basics and check that banks could operate with a negative OCR, and (of course, still) the invisible external members of the Monetary Policy Committee. A high-performing central bank and Monetary Policy Committee would have done a much better job over months of articulating a story, and explaining the place of monetary policy in the mix.

Then, of course, there was the question as to whether had the proposed amendment to b(ii) been in place back in March anything about monetary policy this year would have been different. Orr – probably diplomatically – avoided answering that, but of course the straightforward answer is no. That is so for two reasons. First – and this is a point Orr made in his MPS press conference – the threat to output, employment, and inflation in March was so large that the operational objectives the Minister has given the MPC would simply have impelled a significant easing in monetary policy. But the other reason – actually more an explanation for monetary policy choices than is often realised – is the forecasts. Back in March, hardly anyone (no one I’m aware) would have forecast the rise in house prices we’ve actually seen. Most probably expected – I did – something more like 2008/09, with a dip in prices for a time. So sitting in an MPC meeting in March with an amended b(ii) the house price issues would have appeared moot. Monetary policy would have been conducted just as it was. Oh, and not to forget my point earlier: no one knows what b(ii) means in practice anyway.

But of course if the Minister took any economic advice at all before sending his political theatre letter, he’d have known that too.

So change the Remit, or don’t, in this way and (a) it won’t make any difference to the conduct of monetary policy, and (b) it won’t change the fact that the reforms that might make a real difference now to land/house prices are all matters under the control of ministers already, backed by their majority in Parliament. If my kids can’t buy houses 10 years hence, it is going to be the fault of Ardern and Robertson, and not at all that of the Reserve Bank.