Defending inflation targeting

By Matt Nolan 12/09/2012

[Originally published 30 August 2012]

After seeing David Parker claim that inflation targeting was dead, I felt obliged to chip in with my two cents – which Rates Blog kindly allowed me to do.

In the article I looks at the critique of RBNZ policy based on “imported price spikes” and “credit flows” and point out how the RBNZ framework for this does makes sense – and does not need a change.

My conclusion shifts the blame for any perceived imbalances:

The determination to change what the Reserve Bank does is surprising to me. Our central bank helped to guide New Zealand through one of the largest global shocks imaginable, helped to keep our core banking system together, and by all but the strictest measures they have achieved their monetary policy mandate.

A clear target for monetary policy, a respect for their role in financial stability, and their credibility with the public were the things that helped them achieve this. It makes no sense to turn around and change what the Reserve Bank is doing after such a success.

Instead, those in government should be looking at themselves.

Policies to favour investment in residential property (through tax status and other regulatory focuses) helped to drive the “imbalances” New Zealand faces.

A failure to take into account population aging is making the government fiscal situation look increasingly unsustainable.

Transfers to the middle classes, which we may feel are fair, still come with a cost – bidding up house prices, and reducing capital investment.

If we want to explain the “imbalances” in the country, and what should be done, we need to look at government policy, and the interventionist policies taking place overseas – the monetary policy of the RBNZ is an unrelated scapegoat.

Governments aren’t honest about the costs of their policies.  The decision to introduce working for familes, and generally increase targeted spending, reduces inequality – but it reduces economic activity and “competitiveness”.  We may believe these transfers are fair, that is fine, but no amount of blaming the RBNZ will change the trade-off we face.

Politicians are either lying or are naive about the trade-offs – either way, their bleating is giving you the wrong information, and it threatening to disestablish the institutions that have helped New Zealand do relatively well in the last 20 years.

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