The Joint Macroeconomic Declaration

I’m a bit puzzled about the new Joint Declaration of the Macroeconomic Policy Authorities of the Trans-Pacific Partnership Countries, that dropped into my inbox just after midday, courtesy of the RBNZ and the RBA.  This was, apparently  (and according to the RBNZ/Treasury press release)

“one of a number of issues that the US Congress has required the US Executive to demonstrate progress on, before it will consider passing the legislation necessary to implement TPP”.

The Declaration itself does not state who these “macroeconomic policy authorities” actually are, but I presume that the Reserve Bank of New Zealand and the Reserve Bank of Australia are directly parties to the declaration, even though both have operational independence in respect of monetary policy.  In the New Zealand case, the Minister of Finance has extensive powers to direct exchange rate policy, implemented by the Reserve Bank, but I’m not aware that there are comparable provisions in the RBA Act.

I’m partly curious about who is party to this declaration because I went to the Federal Reserve website, and found no press release or mention of the declaration (while the US Treasury Secretary –  a politician – has put out a release).

The joint Wheeler/Makhlouf statement is an odd affair.  The RBA’s statement is terse, and really just provides a link to the Declaration text.  But the New Zealand statement is substantial (longer than an OCR announcement release) and rather defensive –  perhaps reflecting an awareness of the public unease around TPP itself.  They are at pains to point out that it is all non-binding.  But non-binding statements can still come back to create difficulties in future.

From the Declaration itself, I was struck by the opening sentence:

We, the macroeconomic policy authorities for countries that are party to the Trans-Pacific Partnership…welcome the ambitious, comprehensive, and high-standard agreement reached by our respective governments in Atlanta.

Is that really the sort of political puffery that the Governor of an independent central bank should be signing up to about highly-contentious policies?  One might even ask whether the non-political head of the New Zealand Treasury should be making such statements, rather than (perhaps) leaving them to the Minister –  who could, quite reasonably, congratulate his colleagues.    I was curious what analysis either agency had undertaken to enable them to conclude that the 6000 page agreement was “comprehensive and high-standard”, and have lodged an OIA request with both agencies.

I also noticed the observation that “we further recognize that excessive volatility in capital flows can create policy challenges that may require a policy response”.    But perhaps there are enough qualifiers in that statement to render it meaningless (“excessive” volatility is like “unnecessary” variability –  different in the eye of each beholder).

The heart of the statement is a paragraph on exchange rate policies.

Each Authority confirms that its country is bound under the Articles of Agreement of the International Monetary Fund (IMF) to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage. Each Authority is to take policy actions to foster an exchange rate system that reflects underlying economic fundamentals, and avoid persistent exchange rate misalignments. Each Authority will refrain from competitive devaluation and will not target its country’s exchange rate for competitive purposes.

Authorities commit to “not target its country’s exchange rate for competitive purposes”.  Perhaps this thought might discourage Graeme Wheeler from quite so many references to overvalued exchange rates in his monetary policy pronouncements.    But perhaps more importantly, transforming New Zealand’s economic prospects probably does require a strategy that focuses on a sustained lowering of the real exchange rate, to put New Zealand’s competitive position on a much stronger and more sustainable footing.  Sure, that doesn’t involve using monetary or fiscal policy directly to bring it about, but it really needs to be a key focus of economic policy taken together.  This declaration risks de-emphasising the real exchange rate as an adjustment mechanism.  As for “competitive devaluation”, it is worth remembering that the countries that devalued first came out of the Great Depression fastest –  oftten described as the “beggar thy neighbour” period.  “Competitive devaluation” is mostly an empty phrase in substance, but that won’t stop it being used – cited –  by critics (in the US Congress or other places) if some large TPP country or other (think Japan) actively seeks to depreciate its real exchange rate in ways that might help the country concerned and the wider world economy.

The Declaration also sets some provisions for (at least) annual Macroeconomic Policy Consultations, which will involve yet more travel for some unlucky Deputy Secretary/Deputy Governors.  I was amused at the line that “The Group is to conduct its meetings in a mutually respectful manner” –  the presence of which phrasing probably tells us a lot about the enthusiasm of some authorities to be part of this process.

The sort of talk that will take place at these meetings is surely largely harmless, but not necessarily cheap.  At its annual meetings this Group is to consider the macro and exchange rate policies of each TPP country, including “the policy responses which address imbalances”.  Perhaps we will finally get the long looked-for answers to New Zealand’s persistent macroeconomic imbalances?  Even if the meeting is, say, tacked on in or around the IMF Annual or Spring Meetings, how much time is going to go into preparing background papers, reviewing them, as well the travel etc.  How much does the Reserve Bank of New Zealand really want to know (or do we want to spend on it knowing) about macro policy and imbalances in Vietnam, Brunei or Peru?    At the time of the Funding Agreement earlier in the year the Reserve Bank was keen to stress its austerity, and I had understood that the Treasury was also under funding pressure.  What will be sacrificed so that yet another pointless international meeting can become a regular part of the international schedule?

And what of the defensive RB/Treasury statement?

A few lines caught my eye.

More broadly these commitments could help support stronger trade between TPP countries and seek to avoid practices that are harmful to economic growth and financial stability.

I’m not sure how.  As the agencies keep noting, it is all non-binding, and if (as in the NZ case) it is the Treasury and the Reserve Bank who are the parties, they don’t even the power to commit governments as to how they will use, eg foreign exchange intervention powers.    But this really comes down to the point above: “competitive devaluation” is a meaningless phrase, but the ability to depreciate one’s currency, perhaps sharply, in the event of significant economic weakness is not a power that should be lightly traduced.  What behaviours do Gabs and Graeme have in mind, undertaken by the TPP member countries, that have previously been “harmful to economic growth and financial stability”?  This, after all, is their own commentary, not some international lowest-common-denominator text.

Would the Reserve Bank’s policy on currency intervention breach the Declaration?


No. The framework does not restrict the ability of the RBNZ to intervene.

The framework setting out the operating of currency intervention policy under Section 16 of the Reserve Bank of New Zealand Act provides for interventions when the exchange rate is exceptionally high or low and clearly unjustified by economic fundamentals.  This is consistent with the text of the Declaration.  


Will this restrict New Zealand’s ability to change its exchange rate regime or approach to monetary policy?


No. The text on exchange rates largely echoes New Zealand existing commitments under Article IV of the IM Articles of Agreement. 

The exchange rate elements of the Declaration – for example the avoidance of exchange rate manipulation – are helpful in supporting stronger trade. 

It would be helpful to hear how the Reserve Bank and Treasury regard this document as it affects not just the section 16 activities of the Reserve Bank, but those that could be initiated, at any time, by a Minister of Finance under sections 17 and 18.  Those clauses are much more far-reaching.  I presume this press release was very carefully drafted, and carefully avoided reference to those powers.  Personally, I hope those powers are never used, but they are the powers that would allow for much tighter management of the exchange rate should some future government choose to.  Would such a government be advised by the Reserve Bank and Treasury that such a choice was inconsistent with this declaration?  I hope not.

I also noted that “largely” in the response to the final question.  It would be helpful to have spelt out where this (non-binding) agreement goes beyond the IMF Articles.

And, to repeat the point, the final sentence involves a pretty strong assertion, that there are gains in the form of larger international trade, to be had from non-binding declarations to discourage behaviours that the signatories have not pointed to examples of.  If TPP countries have not been doing this stuff, pledging (in a non-binding way) to go on not doing so can offer no trade gains. If they have been doing this bad stuff, we should be made aware of the examples that the Governor and Secretary have in mind.    Which exchange rate management practices of TPP countries in the last 20 years raise concerns for the Governor and the Secretary?

One does wonder how much this Declaration is aimed at the US Congress (no doubt to a fairly large extent) and how much it is aimed as a pre-emptive shot at China?  Would the parties, for example, consider that a Chinese choice to devalue the yuan in the current environment would breach the provisions of this agreement if China were a party to it.  And would the words strengthen the hands of mercantilist critics, even if the high-minded macroeconomists were unbothered by such choices.?

In the end declarations of this sort are about politics, including the price of getting TPP across the line (if it manages to).  If the agreement really is (quite) good as our government claims   –  or as gung-ho as the US Trade Representative would have one believe, extending more regulation further across the world –   then perhaps it is worthwhile.  Of course, without a proper independent assessement –  eg by the Productivity Commission –  it will be hard to know.     But if it is mainly about politics, it would be been much preferable for gushy statements and commitments (non-binding) to have come from Ministers of Finance –  the true “macroeconomic authority” at least in New Zealand –  and not from non-political and/or independent officials like the Secretary and the Governor.

Surely we deserve better than this?

No, that was not a reference to the latest release from the Reserve Bank on investor finance restrictions.  We do deserve better from them, but I’ll elaborate on that later.

Somewhere along the line I must have signed up for releases from the Minister of Trade, Tim Groser.  I don’t recall doing so, but this release turned up earlier this afternoon

Good afternoon Michael

There’s been a lot of debate recently about the proposed Trans Pacific Partnership (TPP).

The TPP aims to create a regional free trade agreement involving 12 Asia Pacific countries, including Australia, Japan, the United States, Canada, and New Zealand. These 12 countries have combined a GDP of US$27 trillion (NZ$40 trillion).

If we are able to secure a deal, this would deliver massive benefits to the New Zealand economy. It will help to create more jobs for New Zealanders and lift incomes.

“Massive benefits” sounds good, if perhaps implausible (few things governments do actually deliver “massive” benefits).    Whatever the deal, it probably won’t create more jobs either –  higher returns for the jobs we have, and perhaps some different jobs as we gain from more trade, but you can have full employment under tight controls (New Zealand in the 1960s) or under free trade.

Trade is incredibly important to New Zealand. As a small, island nation we need to trade with other countries to ensure we are not left behind. We can’t get richer by selling stuff to ourselves.

The reason the Government hasn’t released much detail to date is because the negotiations are still underway. Just like any normal business deal and other free trade agreement New Zealand has reached, these negotiations are always conducted with a degree of discretion.

The words “extreme understatement” spring to mind in response to that last phrase.

This is about getting the best possible deal for New Zealand, not a deal at any cost. We are confident we will reach an agreement that is in the best interests of New Zealand

Good to know, but the paragraph no longer has the tone of delivering “massive benefits”.

If we are able to secure a deal, New Zealanders have an opportunity to review it and provide feedback. Any deal will require examination by a Parliamentary Select Committee where members of the public will be able to make submissions. Legislation will also need to be passed, which will involve further scrutiny by Parliament, before it takes effect.

As I’ve already mentioned, we will not be signing a deal that’s not in New Zealand’s best interests. I firmly believe the TPP will be hugely beneficial to our country if we are able to secure a deal.

Since the Minister doesn’t seem to know whether a deal will yet even be possible, how can he be sure a deal will be “hugely beneficial”? It is plausible, perhaps, that a deal might offer huge benefits, but surely a deal that is only just good enough to sign must also be possible – otherwise he wouldn’t be uncertain whether there would be a deal at all. And given the uncertainty about any estimates about the impact of micro reforms, a deal he initially thought to be beneficial to New Zealand could turn out later not to have been so. Or vice versa.

I suppose ministerial missives like this are simply meant to lift the spirits. In this case, I can’t see how it works. If he has nothing concrete he can say, perhaps he should just stick to “we’ll be working hard to reach a deal that will benefit New Zealand”.

And the case for an intensive independent review of the costs and benefits of any deal by, say, the Productivity Commission remains strong.