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.
Bob Ford and Peter Jarrett said:
- Inflation targeting doesn’t need to be pursued exclusively in the short term
CPCPI not the only game in town
- Many countries have a more nuanced approach to inflation than New Zealand
- Capital gains tax a fundamental setting required for New Zealand
Bob Ford and Peter Jarrett are in the Economic Division of the OECD. Both have been involved in the OECD Economic Surveys of New Zealand, indeed Peter’s analysis of New Zealand’s tax bias towards property was insightful at last year’s Reserve Bank and Treasury conference.
It is clear that the OECD remains of the view that the absence of a capital gains tax is a substantial reason behind the imbalances in New Zealand’s economy. This must be fixed. There is also support for a land tax (which is not Labour Party policy, but which I note the Chair of the Board of the Reserve Bank, Arthur Grimes, has supported).
Bob Ford emphasised the importance of the control of inflation, and reminded us of the mistakes in the 1970s when pre-inflation targeting and loose policy aimed at driving down unemployment ended up with both high unemployment and inflation. But he says inflation targeting is a long term goal, that doesn’t need to be exclusively pursued in the short term.
The need to look through imported price shocks was acknowledged, which is of course a weakness of CPI inflation targeting. For example, CPI targeting encourages higher interest and exchange rates in response to higher imported oil price rises, at the very time when exporters are less competitive.
We discussed the weakness of recent settings allowing the huge run-up in private debt and house prices. There is a good argument that house price inflation should be included, but it’s difficult to implement as there’s a question of what weighting to give to asset price increases compared to costs of goods and services.
Bob and Peter’s views on implementing targeting while taking into account exchange rates and other issues are more nuanced than the debate in New Zealand.
I was told that Norway is “exquisitely sensitive to exchange rate effects” and Canada is also sensitive to exchange rates. This is also what Ambrose Evans-Pritchard was saying when he said the old primacy of inflation targeting was dead.
A much more interventionist approach comes from Canada and France who use loan terms to control liquidity flows into housing.
Canada and France change the principal requirements, requiring table loan repayments over a maximum number of years. I was told Canada has reduced the number of years a loan can be repaid over, effectively increasing the principal repayments in a way which decreases the ability to pay higher prices for housing. To me this also has effects akin to compulsory savings, in that there is a requirement to repay loans and increase equity.
I’m not advocating any of these approaches directly but given that the higher interest rates we have experienced in New Zealand have driven the carry trade and demand for our currency, we should take these varying examples seriously. The alternative recently pursued in New Zealand, to alter the capital requirements for different lending classes, has different effects, including increasing the costs of business lending.
Our discussion of the difficulties for non-dominant exporters in smaller countries covered the advantages and disadvantages of our currency being pegged to a currency or basket of currencies, and discussed how we are suffering from a rise in the currency relative to the US dollar and Euro unrelated to our exports prices. We discussed the effects of unorthodox practices overseas, an issue which our outgoing Reserve Bank Governor Bollard has recently discussed.
In terms of the effect of our dominant exporter on the currency, Bob Ford recommends New Zealand return to substantial government surpluses of around 2 per cent of GDP, with these to be invested off shore as has been the case with the Cullen fund. He notes the benefit for Chile and Norway of this approach, and thinks government surpluses important given our high levels of private indebtedness.
Of course, in my view better settings for exporters would also aid in the reduction in that private debt.
We left agreeing that the capital gains tax issue is a fundamental setting that needs to be fixed, and were provided with another copy of the April 2011 OECD Economic Survey of New Zealand which made this point.