Green Money

By Eric Crampton 21/06/2013


There is a time and place for non-traditional monetary policy mechanisms.

In a world in which deflationary pressures are strong and the Reserve Bank has hit the zero-bound on interest rates, then standard monetarist macroeconomics and the new monetarists would recommend doing other things increase inflationary expectations. Standard theory tends to expect problems in worlds combining nominal wage rigidity and deflation. And if the Reserve Bank can’t accommodate with nominal interest rate cuts, then things like quantitative easing – or money-printing – start being recommended. If you’re keen on the debates around this kind of macroeconomics, start reading Scott Sumner, Stephen Williamson, Nick Rowe, and the macroblogs. Nolan at TVHE more frequently covers this too; I generally try to stay out of macro.

So “printing money”, per se, isn’t utterly insane. It can be a pretty mainstream response to a very particular and fairly rare set of circumstances. Not all macroeconomists agree about it, but it’s within the mainstream for the set of circumstances that held in some parts of the world over the last few years. But not today’s New Zealand.

While we’re currently below the bottom end of the RBNZ’s target range, that is not going to last. If the RBNZ thought it would, they could and would lower interest rates further. But they’re not doing it. Why? Construction pressures are pushing up in the non-tradeable sector. Further, the depreciation that would come consequent to any serious monetary push, whether from printing money or from big interest rate cuts, would push up import prices and then put more pressure on inflation rates. They’re targeting 1-3% over the medium term and seem on track to be there. iPredict has medium term inflation looking to be under 2%, but over 1%.

And so the debates over the Greens’ “let’s print money to pay for the earthquake” policy have been a bit disappointing.

First off, the Greens have been spectacularly wrong when they’ve argued that their policy can’t be all bad because so many other places are running quantitative easing. Imagine a doctor prescribing a pretty aggressive chemotherapy treatment for a patient who only has a cold. When everybody says he’s nuts, the doc replies “Well, Jim over there’s on chemo, and it seems to be helping him!” There’s a time and a place for aggressive chemotherapy and for quantitative easing; NZ right now isn’t it.

On the other side, there’s been a bit of overstatement claiming that it can never be consistent with standard macro to print money. But I did enjoy The Civilian’s caricature.

Finally, rather than admit that they were really wrong, the Greens instead pulled back from their policy by saying they couldn’t see getting sufficient support for getting QE through – like it’s everybody else’s fault for thinking that doctors shouldn’t jump for chemothearapy for colds.

I hate how economic models prescribing particular corrective interventions for particular sets of conditions get used to justify those policies in every other state of the world. Keynes said to run deficits during recessions; politics turned that into running deficits all the time. Market failure theory says we might want Pigovean taxes for costs people impose on others; politics turns that into excise taxes for costs people impose upon themselves. And then there’s Russel Norman.

UPDATE: I totally do not want to be slamming Russel Norman if he’s changed his mind about the merits of QE under the current circumstances rather than the political feasibility of QE under the current circumstances. Any politician who changes his views on the basis of the evidence should be lauded for the change rather than condemned for U-Turns.

@Davidxvx points me to Wednesday’s ODT:

Dr Norman supported money printing as devaluing the currency, as the United States and Britain had done, saying at the time that “New Zealand can no longer afford to be a pacifist in a currency war”.
Asked if he still supported the policy, he said the consensus position was that while the official cash rate remained close to zero (it is 2.5) there was not a clear role for quantitative easing.
“But were the OCR to drop close to zero then QE would come back into the agenda.”
In that circumstance he believed the Reserve Bank Governor would look at quantitative easing – as he actually can now.

If the cited consensus is that among economists that you don’t run QE when at NZ’s current position, and that he’s reversed because that’s what professionals who work in the area think, then I offer enthusiastic applause.

But I think that Norman is misreading international monetary policy. QE may have had the effect of devaluing the US dollar, but its purpose was to raise inflation expectations and to avoid a liquidity trap. And even places like Switzerland, which has run some active exchange rate targeting, have done it not to boost exports or make manufacturers happy but rather because devaluation can be a way of escaping from a liquidity trapDevaluing is something you can do to loosen monetary policy at the zero bound. And, again, New Zealand is nowhere near the zero bound.

wish that the NZ Greens would take a more interesting monetary policy position, if a Green party is determined to have a position on monetary policy. Imagine Russel Norman commissioning a few reputable academic macroeconomists to look at whether NGDP targeting would make sense in a small open economy, then just adopting whatever came of it. I’m not convinced that NGDP targeting would be much better than our current regime, but it’s defensible. It’s something potentially backed by a growing group of respectable macroeconomists. It can’t be dismissed as simple money-printing. And it would give nice talking points about using monetary policy more actively to support the economy during downturns than we might expect in an inflation-targeting regime.