Comments

David Thompson Posted:
So very, very true. It beggars belief that we consider ourselves to be a developed nation when so much of our economy is based on selling milk powder or logs. BTW, I own a Plinius amplifier (my second) that drives a set of Theophany speakers.
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David Thompson Posted:
A robust but sobering report. It concerns me that confidence is rising, yet sales and exports are down and "manufacturers and exporters are still lagging behind other sectors". Surely we should wait until we're earning more money before we start spending more?
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siemens Posted:
Yes true! The only thing that will never die in this world is the nature and its science behind it. Great post.
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Kieran Ormandy Posted:
Thanks for the question Steven, Germany has seen increases in manufacturing employment since 2009, and Switzerland has had stable manufacturing employment between 2006 – 2011, even in the face of ongoing Euro-zone issues. Korea has seen increases in manufacturing employment since 2008 and Israel experienced large increases since 1998, while being stable over the last 4 years. Singapore has had increases in manufacturing employment over the last two years. These countries all value their manufacturing sectors and work to protect them, this is reflected in the above numbers and their performance through the GFC. Note data around the above examples was sourced from OECD labour market stats.
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John Walley Posted:
Point one: you should have no doubt what our Association says publically represent the views of our members. Point two: we don’t knee jerk responses, if you trace back our comments around NZPower you will see them link all the way back to our research in 2004 and 2005. All that material is fully linked from our comments above. Point three: you will note our comments on major users, sadly the same advantage does not accrue to smaller industrial users. The perverse incentives of the LRMC approach in all this are well known. Point four: the NZMEA is not like any other Association in New Zealand we admit only manufacturers and exporters into membership, and our public expressions are the views of that restricted membership.
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14/12/09

Monetary Policy – has it worked?


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I recently attended the New Zealand Association of Economist’s Annual Meeting where there was a good deal of discussion around the causes of the financial crisis, and how our own approach to monetary policy operated and resonated with the choices of other jurisdictions.

David Preston offered a good appraisal of our monetary policy in his presentation entitled Putting Credit Back into Monetary Policy. His argument was that if you measure the success of monetary policy only by the objectives set out in the Policy Targets Agreement then it has been fairly successful, but if you measure success according to wider economic objectives then it has failed.

A quick look at this inflation chart would lead to the conclusion that the Reserve Bank has kept inflation in the target band over the medium term. A success? Well Maybe.



If we look a little deeper and disaggregate the inflation of the tradeable and non-tradeable sectors and add a few other characteristics, we see a very different picture.



It would seem the Official Cash Rate (OCR) has little impact on inflation in the non-tradeable sector. Non-tradable inflation is consistently outside the target band. Tradeable inflation has fluctuated wildly over the same period, but has averaged only 1.7 percent, well within the target band. Monetary policy has constrained the tradeable sector via interest rates and the secondary but major impact of the exchange rate.

The non-traded economy that is responsible for inflationary pressures has been largely unaffected by the OCR. As Preston noted, the price of credit moved up with the OCR but this was also a period of rapid credit expansion. From May 2004 to May 2009 the money supply expanded at an average of 8.9 percent. Our high interest rates allowed banks to source credit from overseas to fund local asset backed borrowing. Borrowers were largely undeterred by the interest costs because asset prices continued to rise, (well supported by their asset tax haven status) more than offsetting the higher interest bill.

So what can we see:
• The exchange rate has fluctuated wildly as global capital flows chase our OCR movements.
• A large proportion of debt in New Zealand has flowed towards asset tax havens (land and buildings) where the increased interest costs could be covered: that caused the imbalance we see in our economy.
• The OCR has next to no impact on the non-traded economy.

These problems will continue until the rules change. The attempts to control inflation have failed; inflation has only been brought within the target band by almost killing the tradeable sector while inflation in the non-traded economy is demonstrably impervious to interest rates pressure.

So what is worth discussing?
• How can we better deal with non-traded sector inflation?
• What are the factors that might impede such changes?
 



tags: monetary policy, inflation, credit expansion, reserve bank

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Please play the ball not the man.