Book Reviews | Gordon Campbell | News Flashes | Scoop Features | Scoop Video | Strange & Bizarre | Search

 


No Right Turn: Second-guessing the Reserve Bank

Second-guessing the Reserve Bank


http://norightturn.blogspot.com

The political kerfuffle surrounding the Reserve Bank's latest rate increase has reminded me of something I read earlier in the month, and which has been chewing at the back of my mind for the last few weeks.

While in Washington a month ago, Michael Cullen warned of the danger of an "overshoot" by the Reserve Bank, but noted that the government was "in a very fortunate position", and that fiscal policy would "come into play". While he was quick to back away with talk about "automatic stabilisers" (the tax-take declining and benefit spending increasing during a recession), there's a definite implied threat there: if the Reserve Bank does a Brash and tries to strangle the economy to keep inflation down, the government could simply start spending the surplus. It's unclear whether this threat played a role in the Bank's decision to forswear further rate increases in the near future, but it's a possibility.

What's interesting is that this exposes a possible problem with our monetary policy framework, and perhaps with independent central banks in general. The idea that central banks should be independent came about during the 70's, in response to the failure of Keynesian demand-management policies. The Keynesian response to a recession was for the government to spend money to create jobs.

This drove up inflation, but this was seen as an acceptable cost for pulling the economy out of a recession. However, in the 70's, this seemed to stop working; recessions continued, and we got "stagflation" (a stagnant economy with high inflation) instead. The neo-liberal response was to claim that the government should stop intervening in the economy, and instead focus on "price stability" (low inflation) - if left to itself the market would naturally work itself out and solve all problems.

However, there was a significant impediment to this goal, as politicians would constantly be tempted to pursue Keynesian policies to secure re-election - exactly as Muldoon did in New Zealand - and this would detract from the credibility of low-inflation policies (Kydland and Prescott just won the Nobel in Economics for pointing this out).

The neo-liberal answer was simple: remove the economic levers from democratic control, thus allowing central banks to pursue "credible" low-inflation policies. Which is why we have the Reserve Bank of New Zealand Act 1989.

The problem is that there are two major levers on the economy: monetary policy, to do with the money supply, and fiscal policy, to do with how much the government spends. The Reserve Bank only controls one of them. While they are interdependent, and the Bank can with time adjust to changes in fiscal policy, the government could still in theory pursue old-style Keynesian policies.

This wasn't a problem when the idea of independent central banking was first conceived or when the Reserve Bank Act was passed, because back then governments were invariably running deficits - in order to "prime the economy", the government would have to borrow, and this was countered by a commitment not to do so (backed in New Zealand by the Fiscal Responsibility Act 1994 and fear of foreign investors). But if the fiscal policy is tight enough and results in large surpluses (as ours has), the government has no need to borrow.

And this puts it in a powerful position to second-guess the Reserve Bank. If the government thinks the Reserve Bank is unnecessarily strangling the economy or driving up unemployment (as Don Brash did repeatedly in the 90's), it can actually do something about it. While I don't for a minute think that the government is going to go to war with the Reserve Bank, the fact that it could is a constraint on the Bank's behaviour. As long as they continue to run surpluses, we're unlikely to be Brashed again.

ENDS

© Scoop Media

 
 
 
 
 
Top Scoops Headlines

 

Werewolf: Living With Rio’s Olympic Ruins

Mariana Cavalcanti Critics of the Olympic project can point a discernible pattern in the delivery of Olympics-related urban interventions: the belated but rushed inaugurations of faulty and/or unfinished infrastructures... More>>

Live Blog On Now: Open Source//Open Society Conference

The second annual Open Source Open Society Conference is a 2 day event taking place on 22-23 August 2016 at Michael Fowler Centre in Wellington… Scoop is hosting a live blog summarising the key points of this exciting conference. More>>

ALSO:

Buildup:

Gordon Campbell: On The Politicising Of The War On Drugs In Sport

It hasn’t been much fun at all to see how “war on drugs in sport” has become a proxy version of the Cold War, fixated on Russia. This weekend’s banning of the Russian long jumper Darya Klishina took that fixation to fresh extremes. More>>

ALSO:

Binoy Kampmark: Kevin Rudd’s Failed UN Secretary General Bid

Few sights are sadder in international diplomacy than seeing an aging figure desperate for honours. In a desperate effort to net them, he scurries around, cultivating, prodding, wishing to be noted. Finally, such an honour is netted, in all likelihood just to shut that overly keen individual up. More>>

Open Source / Open Society: The Scoop Foundation - An Open Model For NZ Media

Access to accurate, relevant and timely information is a crucial aspect of an open and transparent society. However, in our digital society information is in a state of flux with every aspect of its creation, delivery and consumption undergoing profound redefinition... More>>

Keeping Out The Vote: Gordon Campbell On The US Elections

I’ll focus here on just two ways that dis-enfranchisement is currently occurring in the US: (a) by the rigging of the boundary lines for voter districts and (b) by demanding elaborate photo IDs before people are allowed to cast their vote. More>>

Ramzy Baroud: Being Black Palestinian - Solidarity As A Welcome Pathology

It should come as no surprise that the loudest international solidarity that accompanied the continued spate of the killing of Black Americans comes from Palestine; that books have already been written and published by Palestinians about the plight of their Black brethren. In fact, that solidarity is mutual. More>>

ALSO:


Get More From Scoop

 
 
 
 
 
 
 
Top Scoops
Search Scoop  
 
 
Powered by Vodafone
NZ independent news