Is New Zealand once again leading the way?

In 1990 the Kiwis were the first to adopt inflation targeting, and now there is a report that they may be the first to give the central bank control over both monetary policy and an important tool of fiscal policy:

New Zealand‘s main opposition Labour Party plans to change legislation governing the country’s central bank in its first term if it wins next month’s election, finance spokesman David Parker said.

The plans, which include giving the Reserve Bank of New Zealand an alternative tool for managing inflation, have been discussed with Governor Graeme Wheeler, though “not in detail,” Parker told reporters in Auckland today after Labour began its election campaign. The vote takes place Sept. 20.

Labour wants to give the central bank the ability to recommend changes to the rate of contribution to the national pension savings program, Kiwisaver. The RBNZ could use the new tool as an alternative to the official cash rate to “take the heat out of the economy,” Parker said in April, when the policy was announced.

Quick reactions:

1.  It would be better to rely 100% of monetary policy, particular as NZ doesn’t face the zero bound problem.

2.  But if others insist we need a combined monetary/fiscal approach, then this is far, far better than other forms of fiscal policy.  I would think it would appeal to people like Brad DeLong, who focus a lot on the savings/investment imbalance perspective.



19 Responses to “Is New Zealand once again leading the way?”

  1. Gravatar of Ram Ram
    10. August 2014 at 20:28

    I’ve long thought that there should be a fiscal authority, much like the monetary authority, who sets periodic revenue targets for the Treasury. The congress would be free to decide how to collect said revenue, but the overall revenue target would be set independently. The idea is that, given the path of government spending, and given the yield curve, the fiscal authority can determine what level of revenues would result in a debt trajectory most consistent with a plan for intergenerational transfers. E.g., we decide we want to transfer X from the next generation to ourselves, and the fiscal authority’s mandate is to set a target for revenue that is expected to hit this target (you can see the analogy to monetary policy). If the policy rate hits zero, and thus real yields go negative, the fiscal authority will be obliged to lower the revenue target to a point where this is no longer the case, in much the same way as level targeting calls for action that is never necessary if the target is credible.

  2. Gravatar of Tom Brown Tom Brown
    10. August 2014 at 21:23

    O/T: John Cochrane sounds like he’s in favor of larger capital requirements for banks here, if I’m reading him right:

    Which is surprising to me coming from him. What’s your view? I’m going to guess “I don’t care: that’s not our main problem” but I thought I’d ask anyway.

  3. Gravatar of Eric Eric
    10. August 2014 at 23:21

    O/T, Scott: You have come out in support of new-keynesians such as Swedish economist and former central bank governor Lars Svensson when he argued that Swedish monetary policy had been tight since 2010. However, when looking at your most prefered indicator of monetary stance (NGDP), it suggests that monetary policy in Sweden has been expansionary since 2010, and is right on trend in 2013 (the trend is linear between 1993-2007, the same trend Lars uses in his description of the Swedish economy and the supposed failure of monetary policy in his many blog posts, see for example The difference being that Lars is illustrating RGDP and not NGDP).

    For data =

    Lars main argument has been that real interest rates are relatively high in Sweden, which indicates a tight monetary stance while you would argue that NGDP is a better indicator of monetary stance. How do you reconcile your view of NGDP-targeting and Lars focus on real interest rates as a determinant of monetary stance, especially with the case of Sweden? Is Swedish monetary policy tight, loose or right on target?

    Sorry for the off-topic!

  4. Gravatar of Ralph Musgrave Ralph Musgrave
    11. August 2014 at 01:21

    Well done New Zealand. They’re actually adopting a policy advocated by MMTers and by advocates of full reserve banking (or at least by two advocates of full reserve, namely Prof Richard Werner and Positive Money).


    Re your “fiscal authority”, those already exist in the US and UK and perhaps elsewhere. In the UK there is the so called “Office for Budget Responsibility” and in the US there is some sort of equivalent, though I’m not sure how much real power either body has.

    Tom Brown,

    Cochrane’s proposal is a bit off topic here. But never mind. I fully agree with Cochrane. Massively higher capital requirements solves all the problems addressed by Dodd-Frank and does so in a far simpler manner. The above mentioned advocates of full reserve banking want the requirement raised to 100%. That is lending entities / banks would be funded JUST BY shareholders. In contrast, where depositors want total safety, they put their money into entities that invest just in base money and/or short term government debt. Cochrane sets out his ideas in more detail here:

  5. Gravatar of Becky Hargrove Becky Hargrove
    11. August 2014 at 03:57

    Tom Brown,
    Bill Woolsey also has a response to Anat Admati, here. The article about her and both response posts are quite good.

  6. Gravatar of TravisV TravisV
    11. August 2014 at 04:44

    Fed Vice Chair Fischer Has Made Very Clear Where He Sits On The Hawk-Dove Scale

    “Fischer stated in a speech in Sweden this morning that U.S. and global recoveries are “disappointing,” and may have permanently lowered GDP potential. The media gives disproportionate coverage to a noisy band of Fed hawks, but the center of power at the Fed is firmly in the dovish camp.”

    “With few exceptions, growth in the advanced economies has underperformed expectations of growth as economies exited from recession,” said Fischer in his speech titled “The Great Recession: Moving Ahead.” “Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back. Indeed, research done by my colleagues at the Federal Reserve comparing previous cases of severe recessions suggests that, even conditional on the depth and duration of the Great Recession and its association with a banking and financial crisis, the recoveries in the advanced economies have been well below average.”

  7. Gravatar of ssumner ssumner
    11. August 2014 at 04:50

    Ram, My preference would be for central banks to adopt a policy that insured the policy rate would never fall to zero. If it did fall to zero, my preference would be for more QE, not fiscal stimulus.

    Your proposal might work better in a parliamentary system, where the government is actually able to control fiscal policy. Fortunately that is most countries–but not the US.

    Tom, I thought that was an excellent piece by Cochrane.

    Eric, Sweden has certainly done better than most, but doesn’t that dotted (low interest rate) line look even a bit better? Wouldn’t that support Svensson’s argument?

  8. Gravatar of Eric Eric
    11. August 2014 at 05:03

    Scott: Sure, but that refers to RGDP and not NGDP. Looking at a linear trend from 1993-2007, NGDP has since mid-2010 been on or above the 1993-2007 trend. I am not competent enough to judge that the 93-07 trend is a correct average growth per year – I am only asking if NGDP in this case could be used to assess the monetary stance of the Swedish central bank, since NGDP is above the trend? If NGDP is not enough, which additional aggregates would you use in assessing the monetary stance of Sweden?

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    11. August 2014 at 07:14

    Mario Draghi has his story…and he’s sticking to it;

    ‘German GDP shrank 0.1 percent in the three months through June, the first contraction since 2012, according to the median estimate in the Bloomberg survey. The economies of the euro area and France grew 0.1 percent, separate surveys show. ….

    ‘Spain posted an expansion of 0.6 percent in the same period, the National Statistics Institute said last month. Italian GDP fell 0.2 percent, after a 0.1 percent decline in the previous quarter, taking the country into its third recession since 2008. Draghi took aim at Italy last week for lack of progress in reforms.

    ‘”It’s pretty clear that the countries that have undertaken a convincing program of structural reforms are performing better, much better, than the countries that have not done so,” he said on Aug. 7 in Frankfurt after the ECB left interest rates unchanged at record lows.’

  10. Gravatar of benjamin cole benjamin cole
    11. August 2014 at 08:41

    Egads, central bankers have a predilection for economic asceticism (for others). The further they are kept away from macroeconomic policy tools, the better.

  11. Gravatar of TravisV TravisV
    11. August 2014 at 09:32

    Anat Admati Has Obama’s Attention “” And It’s Causing A Wall Street Freak-Out

  12. Gravatar of TravisV TravisV
    11. August 2014 at 09:51

    Pethokoukis on Anat Admati:

    “The most dangerous woman in America “” and why conservatives should listen to her”

  13. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    11. August 2014 at 10:58

    And Pethokoukis is glossing over some legitimate criticism of Admati by Charles Calomiris;

    ‘The main basis for Admati and Hellwig’s recommendation of a 25% ratio is their view that historical experience shows that, prior to safety net protection, banks maintained that level of equity ratios. But Admati and Hellwig are too glib when making these historical comparisons, and they fail to note some important differences between banks then and now. Bank equity ratios, both in the US and abroad, have varied markedly in the past, and were not generally as high as 25% of assets. Some of the most stable banking systems – Canada’s, for example – have had relatively low equity ratios. The low equity ratios of Canadian nationwide branching banks reflected their greater portfolio diversification and other risk-lowering attributes in contrast to the much riskier single-office (unit) banks in the US. The equity ratios of US banks have varied dramatically over time, and in ways that have clearly reflected changes in their asset risk. Equity ratios relative to asset risk are the key attribute of interest in prudential regulation, not equity ratios per se. Using simple historical equity ratios from some past example as a benchmark, without taking risk into account, can significantly overstate or understate the extent to which current equity ratios of large, global banks should be increased.’

  14. Gravatar of Tommy Dorsett Tommy Dorsett
    11. August 2014 at 13:25

    Lots of problems with this NZ fiscal proposal. First, unless the payroll tax is going to be used to remove currency from circulation, it’s not going to tighten anything. Payroll hikes also could damage the supply side, worsening the PY split and making an inflation targeting central bank’s job harder. The USA tried to rely on ‘tighter’ fiscal policy in the 60s and 70s to reduce inflation and instead it soared. The central bank controls nominal variables; fiscal policy should be aimed at the supply side only. End of story.

  15. Gravatar of Tommy Dorsett Tommy Dorsett
    11. August 2014 at 13:40

    Meanwhile, the same fiscal nonsense (and a failure to define monetary policy properly) pervades the Dallas Fed. Have a look at this Dallas Fed letter. It fails on multiple levels.

  16. Gravatar of ssumner ssumner
    11. August 2014 at 17:10

    Travis, That’s odd, Fischer’s comments don’t sound dovish to me.

    Eric, Yes, you’d want to use NGDP. But I don’t agree that Swedish NGDP is above trend. It’s still well below trend, according to the NGDP graph you link to. Perhaps you made a mistake with the data.

  17. Gravatar of ssumner ssumner
    11. August 2014 at 17:15

    Tommy, Yes, that’s pretty weak.

  18. Gravatar of Peter Drake Peter Drake
    11. August 2014 at 22:43


    I’d like to see the reverse. Elected representatives decide how much to spend and an impartial authority decides the most efficient way to raise it, based on their understanding on the economy and high-level principles established by the government.

  19. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    12. August 2014 at 10:15

    Speaking of DeLong–Bad DeLong, mindreader extraordinaire;

    ‘And then there is the fascinating (and apparently missing) letter from Hayek to Thatcher, apparently urging that Thatcher go all Pinochet-medieval on Neil Kinnock and Arthur Scargill….’

    Neat trick; from a letter he’s not read, he deduces that Hayek urged something ‘medieval’ on Thatcher.

    The Road to Sophism is paved with self congratulations.

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