Top Scoops

Book Reviews | Gordon Campbell | Scoop News | Wellington Scoop | Community Scoop | Search

 

Rankin: The Reserve Bank's Unfortunate Experiment

The Reserve Bank's Unfortunate Experiment

by Keith Rankin

On a trade-weighted basis, the New Zealand dollar has hit 74.5 (6pm, June 21), above the 74.3 peak prior to the June 11 intervention.

If New Zealand has interest rates higher than just about everyone else's (as it currently does), foreign savings are attracted to New Zealand much as moths are attracted to a light source. Intervention by the Reserve Bank to expel the inflow of monetary moths was never likely to do anything more than slow down the rate at which moths are increasingly attracted to us. In fact, the intervention probably makes us even more attractive to foreign savers.

The Reserve Bank, in trying unsuccessfully to stop the New Zealand dollar rising above 75 US cents, has actually encouraged more money to come into the country. The only reason for caution on the part of foreign "investors" is the possibility that the New Zealand exchange rate might experience a very large, rapid and sudden "correction".

The actions of the Reserve Bank have reduced the risk of a dramatic depreciation of the New Zealand dollar. Having shown a willingness to intervene when the dollar is overvalued, the Reserve Bank governor has also suggested to the markets a willingness to intervene when the dollar is undervalued or at risk of becoming undervalued. Further, by intervening to build up New Zealand's official reserves, the Reserve Bank is creating the means to intervene when the dollar is undervalued (a more difficult intervention).

By assuring "offshore" investors that their investments are less risky than they previously thought them to be, the flood of foreign money appears to be increasing rather than diminishing.

The Reserve Bank's brains trust needs to do a complete rethink. Applying a "closed economy" anti-inflation model to one of the most open economies in the world was always doomed to failure. It's time for us to abandon this unfortunate experiment, and refocus monetary policy on sorting out New Zealand's exchange rate and related balance of payments problems.

The experiment in monetary policy dates back to 1989. Today it has reached farcical proportions. There's no evidence that, since 1989, any economic indicator has been better than it would have been if the activist inflation-targeting policy had never been pursued. Many indicators are considerably worse than they would otherwise have been.

********

Keith Rankin teaches economics at the Unitec Business School (krankin [at] unitec.ac.nz)

© Scoop Media

 
 
 
Top Scoops Headlines

 

Keith Rankin: Narrow Vision: Subsidised Cars And Street Immunity
Problems make the world go round. Many of us – maybe the majority of workers, and certainly the majority of well-paid workers – earn our living addressing problems. A problem-free world would represent a major crisis for modern social-capitalism. (Yet standard economic theory continues to present the productive economy as a mechanism for 'satisfying wants', as distinct from 'addressing problems... More>>


Biden In Tokyo: Killing Strategic Ambiguity
Could it have been just another case of bumbling poor judgment, the mind softened as the mouth opened? A question was put to US President Joe Biden, visiting Tokyo and standing beside Japan’s Prime Minister Fumio Kishida: “You didn’t want to get involved in the Ukraine conflict militarily for obvious reasons. Are you willing to get involved militarily to defend Taiwan if it comes to that?” The answer: “Yes. That’s a commitment we made.”.. More>>

Dunne Speaks: Robertson's Budget Gamble On Treasury
The popular test of the success or failure of Grant Robertson’s fifth Budget will be its impact on the soaring cost of living. In today’s climate little else matters. Because governments come and governments go – about every six to seven years on average since 1945 – getting too focused on their long-term fiscal aspirations is often pointless... More>>


Digitl: Infrastructure Commission wants digital strategy
Earlier this month Te Waihanga, New Zealand’s infrastructure commission, tabled its first Infrastructure Strategy: Rautaki Hanganga o Aotearoa. Te Waihanga describes its document as a road map for a thriving New Zealand... More>>


Binoy Kampmark: Leaking For Roe V Wade
The US Supreme Court Chief Justice was furious. For the first time in history, the raw judicial process of one of the most powerful, and opaque arms of government, had been exposed via media – at least in preliminary form. It resembled, in no negligible way, the publication by WikiLeaks of various drafts of the Trans-Pacific Partnership... More>>




The Conversation: Cheaper food comes with other costs – why cutting GST isn't the answer

As New Zealand considers the removal of the goods and services tax (GST) from food to reduce costs for low income households, advocates need to consider the impact cheap food has on the environment and whether there are better options to help struggling families... More>>