The Herald ran an op-ed yesterday under the heading “Why the Government’s new Reserve Bank mandate may lead to worse outcomes”. It was written by Toby Moore who served as an economic adviser in Grant Robertson’s office while he was Minister of Finance (a fact the Herald chose not to disclose to its readers).
I’m more interested in the substance of his argument. Moore is a serious guy, and I suspect he’d run his arguments whether or not he’d ever taken up a role with Robertson. But I think his core argument ends up not very persuasive.
Moore opens his article pointing out that there isn’t an overly strong economic case for having reverted to something very like the old statutory objective for monetary policy. There are certainly bigger economic challenges (albeit probably not ones the law draftsmen could tackle as quickly). As the Governor repeated again yesterday – while trying to minimise the extent to which the previous wording was actually a “dual mandate” (a point on which he was correct, but not a point he’d have made often under the previous government) – no monetary policy decision in the last few years was made differently because of the revised wording of the statutory mandate. That is entirely convincing: the Reserve Bank’s big mistakes (and they were very big mistakes) were forecasting ones. Given their forecasts their OCR choices made (more or less) sense. But they misunderstood how the economy was operating and how real the inflation risks were.
But then Moore attempts to argue that much of the previous 30 years would have been different (and better) if only the Reserve Bank had spent those decades operating under the statutory mandate it had from 2019 to 2023. The episode I want to focus on is that from a decade or so ago. These are his words
One can see the issue more starkly in this chart
As one added bit of context, in 2012 a requirement was added to the Policy Targets Agreements requiring the Governor to focus on delivering inflation near 2 per cent, the midpoint of the 1-3 per cent target range.
I agree with Moore that a series of bad monetary policy choices were made by the Reserve Bank during this period. In fact, while I was still at the Reserve Bank I argued against the proposed tightening cycle that eventuated in 2014 on the twin grounds that core inflation was very low, and (consistent with this) evidence from the labour market suggested quite a lot of slack still in the economy. Once I left the Bank in early 2015, it became a regular theme in commentary on this blog.
But…..the key point is that, once again, economic forecasts were very wrong. The Bank’s forecasts during this period usually had core inflation coming back to the midpoint and needing higher interest rates to keep it there.
And actually I think there is a fair argument - that should appeal to Moore, although not to some others - that during in 2010s one problem was that the Governor, having recently returned from a long sojourn in the US, became fixated on the housing market and the US crisis of 2007-09, and constantly wanted to orient policy to lean against such risks, without ever stopping to consider (a) similarities and differences between NZ and the US, or (b) his statutory mandate. It wasn’t the biggest factor in setting monetary policy wrongly – policy that delivered core inflation bouncing near the floor of the target range for years – the problem was forecasting failure and bad models – but it didn’t help either.
A central bank in the early 2010s (a) strongly focused on the inflation target, and (b) with better forecasts/models (or just looking out the window) would have delivered a lower OCR during that period, and in particular would not have championed a substantial tightening in 2014. That would have had better outcomes for inflation and for unemployment.
Reasonable people can differ on how best to specify and to articulate what we look to the Reserve Bank to deliver with monetary policy, but the problem a decade ago wasn’t some excessive focus on inflation, but a poor understanding (shared of course with many others here and abroad) of just what was going on. Arguably, looking out the window - at actual headline and core inflation - might have given a better steer during that period. A ‘dual mandate’ simply wouldn’t credibly have made any difference, given all else we know. The unemployed paid a price for those limitations/mistakes (as holders of fixed nominal financial assets have paid a big price for central bank mistakes in the last year or two).
Excellent central banks matter. They make a difference to real people, real outcomes. It would be good if we had one, and/or a government seriously resolved to deliver a better one.
