My last meeting in Paris was with a senior economist well versed in monetary policy.
He came straight to the point. There was no ambiguity. In his personal view:
- “It is totally crazy how New Zealand runs monetary policy”.
- “It is the most pure form of inflation targeting of any small country”
- The pure type of inflation targeting New Zealand has run “strikes me as madness”
He believes there is a need to focus more on our exchange rate.
He thinks the differential between New Zealand and overseas interest rates has been bad for New Zealand. He also believes the mix of capital investment in New Zealand has been problematic.
He made reference to changes suggested to “the Taylor rule” for smaller countries.
As we leave Europe to get the views from the IMF and various leading USA-based economists, I am struck by these main points:
- No-one thinks we should ignore inflation.
- New Zealand’s approach to inflation targeting has been extreme.
- Even before the GFC, other countries were more concerned about their exchange rate than New Zealand
- Since the GFC, unorthodox practices have increased, and even the arch defenders of inflation targeting now concede other countries are properly pursuing other interests
- It is common for other countries to use additional mechanisms to guard against liquidity and asset bubbles
- Smaller countries are different to larger economies
- To grow the breadth of our exports we have to counter the additional risks faced by our non-dominant exporters
- Some answers lie in a more nuanced approach to inflation targeting compared with exchange rates, including the greater use of tools other than the interest rate
- Other answers lie outside monetary policy in tax and fiscal and industrial policy, the most important of which is to introduce a capital gains tax.
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.