-
Alan Bollard - Source: ONE News -
Related
The way ahead for monetary policy is another difficult balancing act, which can be made easier by fiscal discipline and a neutral tax system, according to Reserve Bank governor Alan Bollard.
In a speech to the Canterbury Employers' Chamber of Commerce on Friday, Bollard said that New Zealand's inflation targeting monetary policy had proven flexible, durable and successful, but economic growth required more than this.
New Zealand was one of the first countries to target inflation, which it did in 1989 to combat the high rate of inflation and macro-economic instability of the 1970s and 1980s. In the year to March1988 inflation was 9% and by 1991 it was under 2%.
The central bank's current inflation range is between 1-3%.
Bollard said targeted inflation had stood up well to various economic tests, such as migration fluxes, the Asian crisis, and the recent global economic crisis.
"In terms of what it was directly designed to achieve, namely price stability, inflation targeting has been a relative success," he said.
However, he said the extent of the recent financial crisis showed that inflation targeting monetary policy was not sufficient to guarantee comprehensive macroeconomic stability.
Despite this, Bollard believes other monetary policy frameworks may not have provided the flexibility that inflation targeting has, and could have even made it harder to maintain price stability.
Financial stability critical
The key lesson over the last two years of crisis, Bollard said, was that financial stability could not be ignored in thinking about macro-economics and the conduct of monetary policy.
"We know that the difficulty of our job ahead will in part
depend on policy choices made by the major global players as they
exit from current stimulatory policy settings."
As the world emerged from recession, central bankers around the
world were weighing the need to provide ongoing support for a very
fragile recovery against the need to be ready for more normal
conditions.
"This will be yet another delicate balancing act, made more complex in economies like the US by the need to unwind 'quantitative easing', and other unconventional policy support measures."
Choices will need to be made about when to withdraw fiscal stimulus.
"Unlike the synchronised policy easing that we saw in late 2008, the removal of stimulus will occur at different times in different parts of the world, reflecting different recovery paths. Australia has already embarked on the exit road, the US and Europe are still at the door."
A failure to gradually remove the recent fiscal stimulus would put added pressure on monetary policy over the coming period.
Commenting on New Zealand, Bollard said it was easier to achieve both low inflation and balanced growth in an environment of fiscal discipline and when the tax system was neutral with respect to household and company investment decisions.
"We are also hopeful that the recently released report of the Tax Working Group will lead to a more efficient and even-handed tax system. Tax policy is complex and needs to meet multiple objectives. Our concerns are to minimise tax-fuelled property investment and consumption that might detract from more balanced savings and growth," he said.
In the years leading to the crisis there was abundant global liquidity searching for returns in the wrong places, feeding unsustainable asset booms and growing economic balances.
Bollard said that, as a small, flexible and full-service central bank, the Reserve Bank was in a good position to be at the forefront of progress in integrated macro-financial policy design.
He concluded that, at best, new policy instruments could supplement the role of the official cash rate, but will not fundamentally alter it. He said they could take the pressure off the exchange rate but that overall monetary conditions will still need to be "set appropriately to keep inflation stable".
------ends
Alternative monetary policy frameworks would not have provided the
same flexibility to navigate through the crisis, and may in fact
have made it harder to maintain price stability while avoiding
unnecessary volatility in the wider economy.
"Our flexibility meant that, once the global financial crisis hit, we could respond swiftly, cutting the official cash rate by more than 5 percentage points and providing banks with emergency liquidity, when international wholesale funding markets were gridlocked."
Reserve Bank governor Alan Bollard says inflation targeting has
done its job well, but alluded to needing more for economic
growth.
New Zealand was one of the first countries to bring in inflation targeting, which it did in 1989, to combat the high rate of inflation in the 1980s. In the year to March1988 inflation was 9% and by 1991 was under 2%.
The central bank's current inflation target is between 1-3%.
In a speech Bollard to the Canterbury Employers' Chamber of Commerce in Christchurch on Friday, he said targeted inflation had stood up well to various economic tests, such as migration, the Asian crisis, and the recent global economic crisis.
"In terms of what it was directly designed to achieve, namely price stability, inflation targeting has been a relative success," he said.
Bollard said inflation targeting has afforded a certain flexibility in responding to economic shocks in maintaing price stability###.
However, he said the extent of the recent financial crisis showed that inflation targeting monetary policy was not sufficient to guarantee comprehensive macroeconomic stability.
Despite this, Bollard believes other monetary policy frameworks may not have provided the flexibilty that inflation targeting has, or perhaps even made it harder to maintain price stability.
For all the difficulties we faced, as we look back, we can see that alternative monetary policy frameworks would not have provided the flexibility that we had to navigate these waters, and may in fact have made it harder to maintain price stability while avoiding unnecessary volatility in the wider economy. This is particularly clear if we think about policy approaches that target the exchange rate in one way or another.
that other monetary policy frameworks may not have been able to maintain price stability.
However, he said inflation targeting Dr Bollard said that inflation targeting works best in conditions where global economic conditions are stable, domestic fiscal and tax policies are neutral, and the financial system is stable.
"We know that our job will in part depend on policy choices made by the major global players as they exit from current stimulatory policy settings. Central bankers around the world are balancing the need to provide ongoing support for a very fragile recovery against the risk of keeping monetary and fiscal conditions too easy for too long.
He said that , new policy instruments could supplement the role of the OCR, but will not fundamentally alter it. "Ideally, such instruments might change the mix of monetary conditions and take some pressure off the exchange rate. Overall monetary conditions will still need to be set appropriately to keep inflation stable."
alternative monetary policy frameworks would not have provided the
same flexibility to navigate through the crisis, and may in fact
have made it harder to maintain price stability while avoiding
unnecessary volatility in the wider economy.
"Our flexibility meant that, once the global financial crisis hit, we could respond swiftly, cutting the OCR by more than 5 percentage points and providing banks with emergency liquidity, when international wholesale funding markets were gridlocked."
Done well for inflation but hasn't helped boom-bust. Stable prices
aren't be all and end all.
Supplement the
defending inflation targeting, but says it is not enough e.g. needs
tax policy??
New Zealand's inflation targeting monetary policy has proven flexible, durable and successful, but economic growth requires more than this, Reserve Bank Governor Alan Bollard said today.
New Zealand was the first country to formally target inflation. This was in response to the high inflation and macroeconomic instability of the 1970s and 1980s, Dr Bollard said in a speech delivered to the Canterbury Employers' Chamber of Commerce in Christchurch.
"It has now been tested through a long period of growth, as well as droughts, migration shocks, terms of trade changes, an Asian crisis, a dot-com boom and bust, and, most recently, the worst global economic and financial crisis seen in generations.
"In terms of what it was directly designed to achieve, namely price stability, inflation targeting has been a relative success."
Alternative monetary policy frameworks would not have provided the same flexibility to navigate through the crisis, and may in fact have made it harder to maintain price stability while avoiding unnecessary volatility in the wider economy.
"Our flexibility meant that, once the global financial crisis hit, we could respond swiftly, cutting the OCR by more than 5 percentage points and providing banks with emergency liquidity, when international wholesale funding markets were gridlocked."
Dr Bollard said that inflation targeting works best in conditions where global economic conditions are stable, domestic fiscal and tax policies are neutral, and the financial system is stable.
"We know that our job will in part depend on policy choices made by the major global players as they exit from current stimulatory policy settings. Central bankers around the world are balancing the need to provide ongoing support for a very fragile recovery against the risk of keeping monetary and fiscal conditions too easy for too long.
"In New Zealand, successful removal of the recent fiscal stimulus would ease pressure on monetary policy. We are also hopeful that the recently released report of the Tax Working Group will lead to a more even-handed tax system when it comes to investment and consumption decisions."
He said the key international lesson from the crisis was that financial instability can cause problems for the real economy. Authorities were now working out ways to strengthen and improve the prudential supervision of financial institutions.
"In New Zealand, the financial system is a lot simpler than in other parts of the OECD, and has not seen the same types of excesses. Nevertheless, we are taking steps to make our banks and finance companies more resilient to financial system shocks.
"In implementing the Basel II capital framework, we have ensured that banks' assessment of risk is based on a 'through-the-cycle' approach rather than just on the most recent period of growth. We have also put in place a new prudential liquidity policy for banks to make the system less vulnerable to a drying up of international funding markets, such as we saw in late 2008 and early 2009."
Dr Bollard said that, as a small, flexible and full-service central bank, the Reserve Bank is in a good position to be at the forefront of progress in integrated macro-financial policy design.
He concluded that, at best, new policy instruments could
supplement the role of the OCR, but will not fundamentally alter
it. "Ideally, such instruments might change the mix of
monetary conditions and take some pressure off the exchange rate.
Overall monetary conditions will still need to be set appropriately
to keep inflation stable."
