By Alex Tarrant
Labour Party Finance spokesman David Parker is about to embark on a whirlwind tour to meet the world’s top minds on exchange rate controls and monetary policy.
Parker will meet with the likes of Nobel Laureate Joseph Stiglitz, IMF chief economist Olivier Blanchard, representatives at the OECD, as well as other commentators questioning the current orthodoxy of monetary and exchange rate policy.
Lessons from the two-and-a-half-week study tour from August 22 would feed into Labour’s stance on monetary policy, Parker told interest.co.nz. Labour announced in 2009 it was abandoning the consensus that monetary policy in New Zealand should have a single focus on price stability. See the stance it took into the 2011 election on monetary policy in our Party Policy section here.
Parker takes off for his fact-finding tour just as Finance Minister Bill English is negotiating a new Policy Targets Agreement with incoming Reserve Bank Governor Graeme Wheeler. Prime Minister John Key said yesterday the PTA was unlikely to change much from the current one specifying the Reserve Bank target inflation at 1-3% on average over the medium term.
Parker said he had been advancing down the line shifting from that consensus for two years now.
"We withdrew from the cross-party consensus on monetary policy because we thought it had run its race - that it was hindering the New Zealand economy rather than helping it,” Parker said.
“We said that we were willing to challenge some of the orthodoxies – capital gains tax, but also around our exchange rate and monetary policy settings,” he said.
“But it’s also a space where we readily concede that there are complex trade-offs involved, and that it requires careful considered change, rather than knee-jerk reactions.”
Parker noted officials at the IMF had begun to question the current orthodoxies on capital controls, away from its ardent opposition to them to effectively legitimising its support for their use in certain circumstances.
Read a piece by IMF chief economist Olivier Blanchard in June 2011, What I Learnt in Rio: Discussing Ways to Manage Capital Flows.
Also see this Financial Times piece, IMF gives ground on capital controls.
Is inflation targeting dead?
Parker will also meet Jeffrey Frankel, a Professor of Capital Formation and Growth at the Harvard-Kennedy School of Government in the US.
Frankel famously wrote a piece this year titled, The Death of Inflation Targeting. New Zealand led the way with inflation targeting via the 1989 Reserve Bank Act.
While inflation targeting had initially been successful, Frankel said the lack of response from inflation-targeting (IT) central banks to asset bubbles was probably IT's biggest failure.
IT also led to inappropriate responses to supply shocks and terms of trade shocks, Frankel said:
An economy is healthier if monetary policy responds to an increase in the world prices of its exported commodities by tightening enough to cause the currency to appreciate. But CPI targeting instead tells the central bank to tighten policy in response to an increase in the world price of imported commodities – exactly the opposite of accommodating the adverse shift in the terms of trade,
It is widely suspected, for example, that the reason for the European Central Bank’s otherwise puzzling decision to raise interest rates in July 2008, as the world was sliding into the worst recession since the 1930’s, was that oil prices were just then reaching an all-time high. Oil prices are given substantial weight in the CPI, so stabilizing the CPI when dollar-denominated oil prices go up requires euro appreciation vis-à-vis the dollar.
Frankel followed that piece up by suggesting nominal GDP targeting could replace inflation targeting.
'It will be good for NZ'
Parker said it had taken a number of months for him to put the programme together.
“It will be incredibly stimulating, and it will be really, really useful for me, the Labour Party, and I believe, New Zealand,” he said.
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28 Comments
I sat with Parker last year, and heard him bleat "I can't believe we're running out of energy".
Pointed out that it wasn't 'running out', but 'peaking'.
No comprende.
So he'll come back with some nonsense about relating to nominal gdp? Spare me, that's a nonsense measure to start with.
The key here is what happened to 'oil prices', and what will happen to them every time real growth is attempted from here on.
Parker - and Labour and the current Greens - are as much a waste of time as the current in-power mob. Blue growth, Green growth, Red growth, it's all impossible past peak.
Question is whether the IMF know that.
For an otherwise intelligent person its amazing that he'll look at infinite detail and alternatives to inflation targetting but now ignore the elephant in the room that makes any strategy for GDP "growth" moot.
Gob smackingly.....well I dont know what.........except these are our [want to be] leaders....
Ive asked some of the current Green MPs about peak oil and growth and they seem to now want to discuss it at all.....
but then they all have been selling this snake oil for 50 years, now if they admit it they have nothing else to sell...
regards
I get the feeling with the Greens move to the "centre", in the interests of throwing off the hippy dippy tag they are keeping away from anything that is not considered mainstream like continual GDP growth. Imagine a party that advocated steady state economics in NZ current political environment - suicide. Radical policy can only be mooted when things are in crisis or collapse.
Just quietly I believe quite a number of politicians are well aware of peak oil and the implications. They won't speak out for three reasons
1/ it will cause panic
2/ it's political suicide
3/ there is nothing they can actually do since individuals are going have to make painful adjustments to their lives just like the politicians will have to.
I had this very conversation with ACT'S Stephen Franks about 10 years ago and he's no fool - he quit politics.
It's good to see Labour looking at new ideas...but still their main policies are based on higher taxes and election bribes...don't see them moving away from that anytime soon.
If they really do support the workers...they should encourage self reliance, not dependence....and the policy for the future is equal opportunity to capital...that way workers will have an equal opportunity of business ownership...at the moment we have a quasi feudal-capitalist system, as a result of family inheritance.
"A whirlwind tour"....read 'holiday junket'...because if Parker and the socialists were capable of learning anything about "exchange rate controls and monetary policy"...they could do so while sitting at a desk inside their taxpayer funded office...fat chance of Parker trying to improve his awful understanding of economics by that process...a holiday junket is far more fun.
Start by putting some effort into reading everything on this site Mr 'junket' Parker.....
http://globaleconomicanalysis.blogspot.co.nz/2012/08/dimwit-energy-policies-record-corn.html
Here's lesson two for Mr 'Junket'......study the two graphs...then tell us if you have learned anything....http://www.marketoracle.co.uk/Article35951.html
"Bill English is negotiating a new Policy Targets Agreement with incoming Reserve Bank Governor Graeme Wheeler"......silence is golden...not a peep in the media....they haven't even 'broke wind'.....
In short, Bill will tell Wheeler the dealer that the govt has been told by the banks that they would be happy if inflation (debasement) could carry on at 3% plus for yonks...as long as the RBNZ statements talk down the inflation data which will of course be a cookery book figure to start with. No worries Bill....Wheeler knows the score. He would not have got the job had he not known!
Oh and Graeme....toss that LVR control fluff in the round filing cabinet...cheaper for longer is the game boy.
Now we come to what the socialists are planning for 014....their gameplan....
"Uncertainty and the Keynesians
July 20, 2012
by Chidem Kurdas
At the current economic juncture two camps offer diametrically opposed macro policy prescriptions. Economists on the Keynesian side such as Joseph Stiglitz and Paul Krugman advocate further monetary easing by the Federal Reserve and massive new federal deficit spending. The opposing camp includes Austrians and monetarists. Among its distinguished members is Allan Meltzer, who in a recent Wall Street Journal op-ed column argues against monetary stimulus and favors reduced government spending.
These correspond to two ways of understanding the sluggishness of the US economy, explanations based on different time horizons Read the rest of this entry "
http://thinkmarkets.wordpress.com/tag/joseph-stiglitz/
So you have to wonder what these Keynesian splurgers will think of 'Parker from Noddyland'...turning up all gaga at meeting them...and wanting to be told how he can save NZ through printing tons of rubbish and calling it 'money'
No prize then for guessing what Shearer will try to flog off as the best policy since the last time Labour made a goofy attempt to manage the economy.
Tax the " rich pricks " went down a treat last time ........ and a CGT next time should screw up those rich business bastards , and landlords .....
...... gotta give the poor & down-trodden their entitlements .....
Yup , you're on a good thing with Labour , comrade Wolly .....
I agree, Why should we have had to pay out the stupid and the greedy who invested in South Canterbury Finance. Socialism for the investors paid out of our money and future claims on our money. What ever happen to risk and reward? These socialists want it all one way, plenty of rewrads and no risk.
I do my share of name calling, so will not be overly critical of those posting before me; but all you seem to have done is name calling, rather than address whether in fact the Reserve Bank should have different targets and tools.
Given our ingrained current account deficit, and its result- huge indebtedness and limited ownership of anything, clearly and absoultely the tools and targets need to change.
The highlighted section, as follows, demonstrates one of the core problems simply;
"An economy is healthier if monetary policy responds to an increase in the world prices of its exported commodities by tightening enough to cause the currency to appreciate. But CPI targeting instead tells the central bank to tighten policy in response to an increase in the world price of imported commodities – exactly the opposite of accommodating the adverse shift in the terms of trade"
Whether its Labour, the Greens (who I believe already understand the problem)or the Nats coming to the conclusion, does not really matter. In fact better if they all get it. Sadly, given they currently have the keys to the beehive, Key and English do not give the impression of having any clue. Still time though, and good if Parker progresses the conversation.
Fiscal Policy and Monetary Policy are two different things.
Government is reponsible for Fiscal Policy and the Central Bank (if independent) is reponsible for Monetary Policy
Often Central Banks (if they are doing their job properly) are fighting problems caused by Fiscal Policy.
Wikipedia
- Monetary policy is the process by which the "monetary authority" (RBNZ) of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability
- Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy.
Plenty of research material about Fiscal versus Monetary Policy
From what I have seen, the prolifrigacy of the goverment has been accomodated by a central bank that is caught in the headlights, instead of counter-balancing it.
Icon,
Thanks for the explanation, although as it happens I like to think I have a pretty good understanding of the difference between monetary and fiscal policy.
Given the new Reserve Bank governor- and the last one- gets his underlying instructions from the government, then it is critical that the pollies of all colours have some understanding of how monetary policy works.
Separately they have plenty of scope to comment on both his decisions and the outcomes; comments he would no doubt take into account in reality, even if arguably independent.
Key and English I believe are both on record as saying there is nothing, zero, nada, the government and Reserve Bank can do about the exchange rate, (and as a result, the current account) even though every other central bank in the world bar Australia in practice is very mindful of their exchange rate, and does things about it.
Key and English are either naive, stupid, and or not paying attention, or there are other forces at play, (other posters say that is the case, am not so sure)but this is the single most important reason I personally would not vote for them. If they get a reality check, then that could change.
I agree the fiscal balance could be better- although am less certain what I would do to reduce it that would be politically acceptable (pensions to wealthy people apparently being off the table). Monetary policy is relatively easy to fix.
.
New zealand appears to have two distinct economies.
1. The real economy, the actual New Zealand we live and work in.
2. The financial economy.
What we have is an almost complete separation of these two economies. Our dollar is traded by people who do not live here. It is traded by a very small number of people,people for whom there are little or no transaction costs. It is trade in numbers many 100s of thousands time larger than the actual amount used for transactions each day in New Zealand.
So our dollar is not really our dollar at all.
The actual number of dollars out there (the really important thing that determines actual real world inflation) is none of our business either. Even the small amount of our currency that we use for real world transactions is borrowed into existance by foreign owned and controlled banks.
The real economy is 100s probably 1000s of times smaller than the financial econmy.
I agree and understand that process, simplistically at least. Exactly who is doing it, who earns the interest from NZers, who carries the benefit of revaluation, and the risk of devaluation is all a bit murky.
If we believe our dollar is overvalued- and Bollard now seems to have caught up with the IMF and other commentators in deciding that it is; then it would be fascinating to see what effect throwing say a $5 billion new money hand grenade into that trading mix would have. I suspect it would very quickly give the traders the message that there is some downside in trading the $NZ, and the value of the dollar would come off significantly enough. Clearly how the $5 billion was used and put into the markets would need a bit of thought.
Paying off government debt is my favourite, but there may be better methods.
Who would bear the cost of the resulting devaluation is publicly unclear. Foreign investors; foreign sovereigns, our banks, or our government are all candidates, depending on their agreements.
If you believe the theory I reproduced above, then, while government runs constant deficits, the reserve bank should be pushing interest rates up to counter-balance it. But, seemingly it's not. Why not? The reserve bank is compounding the problem, is it not? The reserve bank is part of the problem, is it not?
Who would bear the cost of the resulting devaluation is publicly unclear. Foreign investors; foreign sovereigns, our banks, or our government are all candidates, depending on their agreements.
And me - forget it, not interested - I love my strong currency and so would you if you had enough of it. Exporters have long left this country except those dependent on the gifts of nature, which we are all entitled to, I suppose. So any significant devaluation of say the NZD/USD pair would send us to the poor house immediately.
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