Archive for April 18th, 2017

Will Reserve Bank of New Zealand have dual objective like Fed? Inflation and employment?

April 18, 2017

How tides keep turning. Reserve Bank of NZ was the first bank to start inflation targeting formally in 1989. Since then, inflation targeting has become a huge buzzword across central banking circles with more and more central banks taking up targeting inflation.

Now the pioneer of inflation targeting could be made to reconsider and change its single mandate. If the Labour government comes to power in NZ, there are high chances that the RBNZ Act will be changed and employment will be added to the single objective.

The superb blog on NZ economy – Croaking Cassandra blog reports:

I’ve already written a bit about Labour proposals on monetary policy (here and here) and, for now at least, I don’t want to write anything more about the proposed changes to the decision-making process or the plan to require the Monetary Policy Committee to publish its minutes.  If there are all sorts of issues around the details of how, I haven’t seen anyone objecting to the notion of moving from a single decisionmaker model to a a legislated committee, or objecting to proposals to enhance the transparency of the Bank’s monetary policy.    The Bank was once a leader in some aspects of monetary policy transparency, but is now much more of a laggard.

Where there has been more sceptical comment is around Labour’s proposal to add full employment to the statutory monetary policy objective.    At present, section 8 of the Reserve Bank Act reads as follows:

The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices.

Responding to this aspect of Labour’s announcement hasn’t been made easier by the lack of any specificity: we don’t know (and they may not either) how Labour plans to phrase this statutory amendment.    There are some possible formulations that could really be quite damaging.  But there are others that would probably make little real difference to monetary policy decisionmaking quarter-to-quarter.  Probably each of us would prefer to know in advance what, specifically, Labour plans.  But this is politics, and I’m guessing that there is a range of interests Labour feels the need to manage.  In that climate, specificity might not serve their pre-election ends.  One could get rather precious on this point, but it is worth remembering that there are plenty of other things that may matter at least as much that we currently know little about.  Under current legislation, who becomes the Governor of the Reserve Bank matters quite a lot to shorter-term economic outcomes, and we have no idea who that will be.   The details of the PTA can matter too, and under the governments of both stripes the process leading up to the signing of new PTAs has been highly secretive (often even after the event).  For the moment, we probably just have to be content with the “direction of travel” Labour has outlined.

In some quarters, Labour’s plans for adding a full employment objective have been described as “cosmetic”, as if to describe them thus is to dismiss them.    That is probably a mistake.  When I went hunting, I found that cosmetics have been around for perhaps 5000 years (rather longer than central banks).   People keep spending scarce resources on them for, apparently, good reasons.     Why?  They can, as it were, accentuate the positive or eliminate the negative –  highlighting features the wearer wants to draw attention to, or covering up the unsightly or unwanted marks of ageing.    They (apparently) accomplish things for the wearer.

🙂

Further, in all NZ elections central bank objective has been a focal point:

What is the relevance of all this to monetary policy?  Well, there has been a long-running discontent with monetary policy in New Zealand, especially (but not exclusively) on the left.  In the 28 years since the Act was passed there has not yet been an election in which some reasonably significant party was not campaigning to change either the Act or the PTA.  We haven’t seen anything like it in other advanced countries.   Personally, I think much of the discontent has been wrongheaded or misplaced –  the real medium-term economic performance problems of New Zealand have little or nothing to do with the Reserve Bank –  and many of the solutions haven’t been much better (in the 1990s, eg, Labour was campaigning to change the target to a range of -1 to 3 per cent and NZ First wanted to target the inflation rates of our trading partners, whatever they were).     But that doesn’t change the fact that there has been discontent –  and more than is really desirable.

But what about the trade-off?

I’m quite clear that there is no long-run trade-off adverse trade-off between achieving and maintaining a moderate inflation rate (the sorts of inflation rates we’ve targeted since 1990) and unemployment.  And since something akin to general price stability generally helps the economy function better (clearer signals, fewer tax distortions etc) there is at least the possibility that maintaining stable price might help keep unemployment a little lower than otherwise.  Milton Friedman argued for that possibility.

But I don’t think that is really the issue here.

Because it is not as if there are no other possible connections between monetary policy and unemployment.   Pretty much every analyst and policymaker recognises that there can be short-term trade-offs between inflation and unemployment (or excesss capacity more generally –  but here I’m focusing on unemployment).   Those trade-offs aren’t always stable, even in the short-term, or predictable, but they are there.    Thus, getting inflation down in the 1980s and early 1990s involved a sharp, but temporary, increase in the unemployment rate.  That was all but inescapable.  And when the unemployment rate was extremely low in the years just prior to 2008, that went hand in hand with core inflation rising quite a bit.  Monetary policy decisions will typically have unemployment consequences.    Unelected technocrats are messing, pretty seriously, with the lives of ordinary people.   It is all in a good cause (and I mean that totally seriously with not a hint of irony intended) but the costs, and disruptions, are real –  and typically don’t fall on the policymaker (or his/her advisers).

And it isn’t as if monetary policymakers are typically oblivious to the pain.   There was plenty of gallows humour around the Reserve Bank in the disinflation years, a reflection of that unease.  And yet often the official rhetoric is all about inflation –  as if, in some sense, what look like relatively small fluctuations around a relatively low rate of inflation, matter more than lives disrupted by the scourge of unemployment.

So perhaps that is why cosmetics can matter, and serve useful ends even in areas like monetary policy.

Hmm..age old debates once again come to the surface when we were told they have been addressed. Inflation targeting was seen as the only thing that worked given NZ’s experiences. Now with pioneer considering changes, will it lead to change in thinking in other countries too?

There is little doubt that central banks though may just be targeting inflation but their actions have wide ramifications on the entire economy. This is particularly tricky in case of growth/employment issues which have to be answered by politicians. Thus, central banking is far more politicised than we imagine.

Interesting times. Who knows we could be going back to old central bank debates if we see so called cosmetic changes in RBNZ…

The CPI is a false guide for monetary policy…

April 18, 2017

Before being introduced to Austrian economics (too late, but better late than never), one just took economics ideas and concepts as given in textbooks. Macroeconomics textbooks were around two policies – fiscal policy and monetary policy. In monetary policy the main thing was inflation and in fiscal taxes and deficits. The way to measure inflation was consumer price index. A central bank’s main role was to keep inflation under control and for this CPI was the best measure. All these ideas were written in a manner which rarely made us question them.

This piece by Prof. Richard Ebeling questions the usage of CPI for monetary policy:

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Why financial entities become customer unfriendly as they grow in size…

April 18, 2017

Nice piece by Ms. Uma Shashikant. It discusses how there is trade off between local service and scale economics. As organisations grow in scale, they compromise on local services. This is perhaps more acutely faced in financial industry more than other industries.

Working around bars at highway ban, Kerala style…

April 18, 2017

As the saying goes, you can keep alcohol away from a Keralaite but cannot keep Keralaite away from alcohol (many communities in India will fight to owe this tagline).

Given the recent Supreme court ban of keeping bars atleast 500 mteres away from highways, this bar in Kerala comes with an innovative way to jump the ban (HT MR blog).  Moreover, the ban seems to be inspired from an old Malyalam movie where similar ban was imposed due to religious sentiments..

Superb stuff. Despite umpteen instances showing such bans rarely work, the high officials keep at it..

Trading ideas between countries…

April 18, 2017

Ana Maria Santacreu of St Louis Fed posts on the topic. She shows how trading ideas between countries helps in innovation across borders:

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Income tax implies that Government owns you

April 18, 2017

One of the biggest hoodwinks of governments worldwide has been to convince people that any income on which you pay taxes is white and what you manage to hide is black. It is just amazing how convincingly governments have managed to do this and how easily we have bought into this idea. Even so called liberals buy into this idea. The history of this conviction has to be tracked and written as it makes for a great story.

This piece from Jeff Tucker is a reminder that income tax is the root cause of all evil.

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