I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.
Jorgen Elmeskov says:
Exchange rate competition heating up globally
Turkey’s short term risk policy for investors of interest
Lack of a capital gains tax is a fundamental reason for New Zealand’s over investment in property
Over two days I’ve had a series of meetings at the OECD. This meeting is with the OECD’s Deputy Chief Economist Jorgen Elmeskov and two of his off-siders Jean-Luc Schneider and Boris Cournede.
This was an interesting discussion on the influence of measures to control inflation. The meeting started and ended with their suggestion that, faced with a prolonged current account deficit and high net international liabilities, factors like export competitiveness are proper concerns.
I was glad to see they readily conceded that increasingly governments and reserve banks are focusing on the competitiveness of exchange rates. Something I’m most concerned about.
It was also interesting to note they don’t oppose a medium-term (ie three to ten years) monetary policy “to stand against an inflated currency”.
They had interesting ideas on the effects of serial short term investors on currencies, a big issue for New Zealand. Turkey was a case in point.
By allowing a wider band both for expected exchange rates and interest rates, and expressly announcing their intention to change both the width of the bands and the place they favour within the bands without notice, they are trying to create risk for traders which will push against short term trading in their currency, reducing upward pressure.
Another option was to tax inflows of money which can put upward pressure on the exchange rate. Brazil has done this recently (with support from the Economist magazine). But they noted the politics can be difficult.
We turned to New Zealand. They were aware of our poor savings record, but were quick to say that just because traditional monetary policy settings in the last two decades have seen a blow-out in private debt, that does not mean it will happen again. That, of course, is true but is hardly a stout defence of the orthodoxy.
They agreed the lack of a capital gains tax is a fundamental reason for our overinvestment in property and inadequate savings and investment in non-property assets. They were surprised we did not have one, yet allowed tax deductibility of interest.
They proposed an interesting solution to the ‘Dutch disease’, where dominant resource-based exporting industries boost the exchange rate and lower the competitiveness of other industries.
They said where natural resource exports have currency effects, the resources used should be taxed, not as an increase in total taxation but as a tax substitute. They favour resource taxes recycled into offshore investments (as the Norwegians do) to limit the currency effects of resource extractive industries on other parts of the economy.
An interesting discussion but their knowledge was weighted towards the larger economies that dominate world affairs, and they had few suggestions for how New Zealand’s circumstance could be improved. I did find their knowledge of New Zealand a little scant, after all we are a member of the OECD and help fund it.