Fallow on monetary policy
Brian Fallow writes in the NZ Herald:
Listening to a procession of manufacturers say their piece to the parliamentary inquiry into manufacturing this week, two things were clear.
One is that the high dollar is causing real and lasting damage to their sector.
The other is that the idea that an overvalued exchange rate is the fault of the monetary policy framework has hardened into dogma.
Cast off outdated neoliberal doctrine. Change the Reserve Bank’s mandate. Then New Zealand manufacturers will have a fighting chance. That was the message.
It echoes statements like this from Labour leader David Shearer last Sunday: “We’ll make changes to monetary policy so that our job-creating businesses aren’t undermined by our exchange rate.”
It is glib. It glosses over difficult questions about what changes they have in mind, and what the costs, risks, trade-offs and spillover effects would be
All correct.
And it misdiagnoses the problem, which is that the rather enfeebled state of much of the other 99.8 per cent of the world economy has led to policies abroad which are unhelpful from New Zealand’s point of view and which we can only hope succeed.
This is in fact the major point. The US and Europe are poked (for now) and their dollars are weaker. Politicians preaching how we can rectify this are dreaming. If we want proof that this is about the weakness of the US$ and the Euro, not a strong NZ$ – look at this graph from ANZ:
As you can see we are in fact historically quite low against the Australian dollar.
If the object of the exercise is to ensure that in the future the Reserve Bank runs monetary policy looser than it otherwise would, consider this: higher inflation would lower real wages, and real incomes more broadly, in the hope of protecting jobs in the favoured sector. Should the union movement support that?
Lower interest rates would increase the risk of a housing bubble that, this time, bursts messily all over us. Ask the Irish tradesmen flocking to Christchurch how much fun that is.
If it succeeds in making New Zealand exports cheaper to foreign buyers – a pretty big if – it will also make New Zealand assets cheaper to foreign buyers. That should give economic nationalists in New Zealand First and the Greens pause.
So nice to have someone print this out.