Let's look again at NZ Monetary Policy

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    14-Jun-2015

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  • 1. Questions
    Lets look again at monetary policy

2. No magic bullet!
Many things contributed to this problem
3. But how depressed do you want to be?
Page 3
Singapore has the answers
4. No magic bullet!
Well perhaps there is..
Lets look at Singapore

5. They knew what effect monetary policy has on their economy
Page 5
Singapore has the answers
6. We where leading GDP per capita till 1984!Yes that was the year we floated the dollar
Page 6
Singapore has the answers
7. Which country would you want to export from?
Page 7
NZD to USD last 12 months
Singapore $ to USD last 12 months
Singapore has the answers
8. Trade Weighted Index matters
Like Singapore, we need to protect our exporters by managing the exchange rate within acceptable bounds relative to our trading partners.
Page 8
Singapore has the answers
9. Singapore's success was not an accident
Since 1981, monetary policy in Singapore has been centered on the management of the exchange rate. The primary objective has been to promote price stability as a sound basis for sustainable economic growth.
The Singapore $ is managed against a basket of trading partner currencies
The trade-weighted exchange rate is allowed to fluctuate within a policy band
level and direction of which is announced to the market periodically
The exchange rate policy band is reviewed to ensure that it remains consistent with the underlying fundamentals of the economy.
The band can move up or down (to allow for expected appreciation or depreciation)
The level and slope of the band may also be adjusted
The adjustments are made in a manner that is designed to promote price stability.
Thus the type of exchange rate employed is very different from a traditional fixed exchange rate.
Page 9
Singapore has the answers
10. Singapore's success was not an accident
In addition Singapore employed Capital Management Techniques with the purpose of
Insulating from disruptive speculation
Protection of the soft FX peg
Increased financial stability
Page 10
Types of Capital management techniquesObjective of capital management techniques
Singapore has the answers
11. Singapore is an acknowledged success
Page 11
Singapore has the answers
12. Radical
policies?
Only from a
New Zealand
perspective

13. Optimal Bank Regulation and Monetary Policy
Optimal Bank Regulation and Monetary Policy,John J. Seater, October 2000, The Wharton Financial Institutions Center
"Optimal monetary policy and bank regulation are simultaneously determined, implying that there must be tight coordination between the central bank and the regulator."
"Bank regulation affects the money supply, so it ends up being chosen simultaneously with and therefore influenced by monetary policy. However, bank regulation directly affects output, so monetary policy affects output indirectly. Optimal choice of monetary policy takes this indirect effect into consideration."
"Bank regulation should be active rather than passive, continually changing in response to economic conditions.
Page 13
Singapore has the answers
14. Optimal Bank Regulation and Monetary Policy
Optimal Bank Regulation and Monetary Policy,John J. Seater, October 2000, The Wharton Financial Institutions Center
New results are that monetary policy affects the expected level as well as the variance of output, bank regulation should change continually in response to the state of the economy, and bank regulation and monetary policy should be tightly coordinated. This last result has important implications for the institutional arrangements for conducting regulatory and monetary policy

Page 14
Singapore has the answers
15. Should Financial Flows Be Regulated?
Gerald Epstein, July 2009, Political Economy Research Institute (PERI), University of Massachusetts, Amherst

"capital management can enhance democracy by reducing the potential for speculators and external actors to exercise undue influence over domestic decision-making either directly or indirectly (via the threat of capital flight)"
"Capital management techniques can promote financial stability through their ability to reduce currency, flight, fragility, and/or contagion risks"
"Capital management can discourage less desirable types of investment and financing strategies by increasing their cost or precluding them altogether"
Page 15
Singapore has the answers
16. What we do by contrast

17. How we destroy our economic sovereignty
RBNZ Forecasts
higher inflation
Consumption
increases
RBNZ Increases
Interest Rates
This attracts foreign
funds
House / Farm prices
increase
NZ money supply
increases
More careless
lending
NZ$ exchange
rate increases
Financial
Failures
Carry trade
drives up NZ$
Tradable economy
stalls
Page 17
Singapore has the answers
18. Banks via the OCR fueled the last bubble
Money in circulation increased as the OCR went up
Flooding the market place with money will fuel inflation
Which will further increase the OCR
Page 18
Singapore has the answers
19. Our OCR only effects tradable inflation
Page 19
Singapore has the answers
20. Monetary policy does matter(example)
Monetary
Policy
Demand for
Credit
Asset
Appreciates
Yes
Floating
Where doesthe bank get the bestreturn
X
No
Pegged
Money to lend
X
No
Managed
The monetary polices of Korea and Singapore are designed to protect their productive economy
Page 20
Singapore has the answers
21. Export vulnerability (2007) [D]
Volume of currency traded
Countrys GDP
Value of exports
Countrys GDP
Countrys GDP
World GDP
=
x

Page 21
Dont have our form of monetary policy !
Singapore has the answers
22. The extent to which NZD is traded (2007)
Times GDP
Volume of currency traded
Countrys GDP
=
Page 22
Singapore has the answers
23. FX traders love volatility (Its the US. yeah right!)
Page 23
All measured a % variation against the USD
Singapore has the answers
24. Stability matters
Would you invest in an exportbusiness where
revenue could vary by 60% (while your production is constant)
your funding could not be guaranteed beyond a few months
the cost of funding was linked to property speculation and inflation
This is why New Zealand has one of highest participation rates and one of the lowest productivity rates
Page 24
Singapore has the answers
25. The results.. Business v Housing (excluding agriculture)
Page 25
Singapore has the answers
26. Equity matters and its eroding!
A stalled export sector is only part of the damage caused by the inflow if capital
Not surprisingly the increased debt is eroding our net equity to GDP
New Zealand Net International Asset Position
Page 26
Singapore has the answers
27. Banking behavior REALLY matters
Banks tookadvantage of the last upswing
They managed the inflow of funds attracted by the workings of the OCR mechanism
The inflow was then passed on to eager property investors
Dramatically increasing national debt
Lifting the OCR, exchange rate and thus killing exports
Page 27
Singapore has the answers
28. Yes we need a bigger Kiwi Bank!
Page 28
Singapore has the answers
29. The scourge of property speculation
The pyramid selling scheme that is property speculation
doesnt create any sustainable jobs
earn any foreign currency or
pay any tax
Yet its existence has
created a vacuum to suck in foreign capital (and increase our national debt)
drives up interest rates via the OCR as the property markets become inflationary
drives up the exchange rate as the OCR increases
made our housing amongst the least affordable in the OECD
Page 29
Singapore has the answers
30. Remove the poverty tax
Bill and Jim work together
Bill invests in property Jim doesnt
Bill gets deductions against his PAYE reducing his tax
Jim must therefore carry a higher % of the tax burden
When Bill sells his house he doesnt have to repay
The lost tax,or the lost tax and interest or the lost tax interest and opportunity cost
So in effect a portion of Jims earnings (via tax) has ended up in Bills pocket.
This process is a poverty tax on all hardworking productive New Zealanders.
Why would you allow something that is actually destroying our country to become a tax on our poorest people and our exporters.
Page 30
Singapore has the answers
31. Singapore delivers
Page 31
Singapore has the answers
32. Singapore has no natural resources
Page 32
Singapore has the answers
33. Current account gives options
Page 33
Singapore has the answers