Red Alert

Archive for the ‘Inflation’ Category

Jeffrey Frankel on the Asian solution

Posted by on September 7th, 2012

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.

Jeffrey Frankel says:

• He prefers nominal GDP over CPI for inflation measurement

• Inflation targeting hasn’t stopped asset bubbles

• Asian economies show exchange rate focus doesn’t come at expense of inflation

Jeffrey Frankel is a Professor at the John F Kennedy School of Government at Harvard, holding the chair in capital formation. He is a prolific writer and has published widely on the subject of monetary policy and exchange rates over a number of decades.

Professor Frankel reminded us that times change, saying the world had at different times given primacy to targeting exchange rates, then money supply and then inflation. Each one of these has led to shocks in the past. He could have added to that list, even earlier, the gold-standard.

He has previously written that:

• no single currency regime is best for all countries

• no single currency regime is a panacea

• even for one country, no single currency regime is necessarily best for all times

As he has written, life always involves trade-offs. Countries have to balance the advantages of more exchange rate stability against the advantages of other flexibility. He notes that: “‘Fixed versus floating’ currency debate is an oversimplified dichotomy. There is, in fact, a continuum of flexibility”. Options include.

• a currency union

• a currency board

• a truly fixed exchange rate

• adjustable peg

• crawling peg

• basket peg

• target zone or band

• managed float

• free float

Prof Frankel is interested in New Zealand but he was understandably reluctant to advise what he thought would be the best settings for New Zealand in the absence of in-depth knowledge of our exact circumstances. He did note his preference for grounding inflation measurement in nominal GDP rather than the CPI, and that he favours product price targeting for some commodity exporters.

He said that the GFC showed that central banks pursuing inflation targeting had commonly failed to properly take into account asset price bubbles, but said the answer to that probably lay in prudential policies (such as those I have mentioned in earlier blogs) rather than interest rates.  I said that was my view too, noting that the carry trade was a large part of the problem in New Zealand.

Prof Frankel said that Asian countries have shown that it is possible to successfully influence exchange rates for lengthy periods while not giving up on monetary independence. “Central banks can maintain the exchange rate lower for longer – 10 years plus, or at least longer than some of my colleagues would suggest – without giving up their credibility on inflation”.

On the principle of the supposedly impossible trinity (ie that a country must give up on one of three goals – exchange rate stability, monetary independence, or financial-market integration; it cannot have all three at once), Prof Frankel has said that as financial markets are becoming more integrated internationally, the choice has narrowed towards giving up exchange rate stability or monetary independence. “But this is not the same thing as saying that one cannot give up on both, that one cannot have half-stability and half-independence.”

That is, exchange rates can be influenced for longer periods than have been traditionally acknowledged by most economists, without losing the battle to control inflation. This has of course advantaged the exporters from countries that have achieved this, and contributed to current account surpluses.

I would note this is exactly the opposite experience to what has occurred in New Zealand.

Along with his extensive knowledge in this area another research interest of his is how to achieve politically acceptable national greenhouse gas emission targets in order to attain global CO2 concentrations of 460ppm. This man is a force for the good.

Budget FAQs #5: Growth Hockey Stick

Posted by on May 19th, 2011

The New Zealand economy has failed to fire under National.  As a result successive rosy Treasury forecasts have been revised downwards.  The starkest example is between last year’s May Budget and December Half Year Update.  

  2010 GDP Track Revision

Implications: The  growth upturn “hockey stick” just keeps getting pushed out into the future.  The so-called GST tax switch had no discernable positive impact on growth.  And the same rosy forecasts will be embedded in today’s Budget.  On this track record Budget 2011 growth  projections will not be worth the paper they are written on.

When the 2009 growth projections are added the picture gets even more interesting.  As this graph shows the actual GDP growth track has been so bad that it is back down to the proections made by Treasury during the darkest days of the 2008/9 global financial crisis.  

   2009-2010 GDP Track

In other words, despite the international crisis having passed 18 months ago and NZ receiving record prices for our agricultrual commodities, our economy has performed so badly that it is back down to the track Treasury predicted during the darkest days of the crisis.   Quite simply, whatever the Govt has been doing is not working. 

In a future post we will decompose the relative impact on debt of this under-performance and otehr factors like earthquakes.

There is no coherent plan from National on how to manage debt reduction alongside needed investments in economic and export development, closing the savings gap, repairing the damage to middle New Zealand, and giving all Kiwis hope and confidence for the future.

Labour has an integrated economic strategy that will achive that withi a fully costed programme that will reduce net debt over a 10 year economic cycle.  You can see the direction we are heading in set out in a recent speech I gave to Business NZ  here.

For the wonks among you, here is the underlying data – all the Government’s own numbers.

  GDP per capita, 95/96 dollars    


Half Year Update 2009

Budget 2010

Half Year Update 2010






































































 Sources: Budget relevant documents and Statistics NZ series

Campbell Live – Cost of Living

Posted by on May 13th, 2011

The rising cost of living will be a feature of the election campaign. The median real wage has dropped substantially under the National government.

“Our families aren’t eating”

Posted by on April 18th, 2011

That’s what I’ve been hearing today – not in the parts of Auckland where I know families have been struggling under this government for some time, but in the relatively affluent and true blue areas of Warkworth and Orewa.

I heard a lot of despair from people today. Steep increases in the prices of necessities, such as food and fuel, are taking their toll, and people say it’s been all downhill since the GST increases. Then today’s news of a 4.5% increase in inflation mean things are going to continue get worse, not better.

It’s no wonder. Vegetable prices have risen by 12.1 percent in the past year, milk, cheese and eggs by 8.8 percent, petrol by 17.1 percent, and electricity by 6.0 percent. Wages, for those who have jobs, have stood still.

There’s resentment there too about the government’s tax cuts for the better off, while meantime life has gotten tougher for those on low and middle incomes.  Even in these towns, more families are resorting to food parcels for support.

I was surprised by the depth of feeling and despair I encountered today.

It worried me too.

The government has no plan, and it’s showing.  Everywhere.