Transcript
Page 1: Let's look again at NZ Monetary Policy

Questions Let’s look again at monetary policy

Page 2: Let's look again at NZ Monetary Policy

No magic bullet!

Many things contributed to this problem

Page 3: Let's look again at NZ Monetary Policy

But how depressed do you want to be?

Page 3“Singapore has the answers”

Page 4: Let's look again at NZ Monetary Policy

No magic bullet!

Well perhaps there is…..

Let’s look at Singapore

Page 5: Let's look again at NZ Monetary Policy

They knew what effect monetary policy has on their economy

Page 5“Singapore has the answers”

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We where leading GDP per capita till 1984!Yes that was the year we floated the dollar

Page 6“Singapore has the answers”

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Which country would you want to export from?

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08/24/200810/21/200812/18/200802/14/200904/13/2009 6/10/2009 8/07/20090%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

08/24/2008 10/29/2008 1/03/2009 3/10/2009 05/15/2009 07/20/2009-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%Singapore $ to USD last 12 months

NZD to USD last 12 months

“Singapore has the answers”

Page 8: Let's look again at NZ Monetary Policy

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”

Page 9: Let's look again at NZ Monetary Policy

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”

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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

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Types of Capital management techniques Objective of capital management techniques

“Singapore has the answers”

Page 11: Let's look again at NZ Monetary Policy

Singapore is an acknowledged success

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Monetary Policy in East Asia: the Case of Singapore,

Bennett T. McCallum, August 2007, IMES Discussion Paper Series

"..use of the exchange rate, rather than a short-term interest rate, as the principal instrument/indicator variable for monetary policy, may provide a relatively more effective

way of managing aggregate demand"

"In light of Singapore’s macroeconomic success over the past 15 years, as discussed by various writers including Devereux (2003), Gerlach and Gerlach-Kristen (2005), McCauley (2001), Parrado (2004), and Rajan and Siregar (2002), it seems apparent that this type of

policy regime could be an attractive contender for adoption by other highly open economies"

“Singapore has the answers”

Page 12: Let's look again at NZ Monetary Policy

Radical policies?

Only from a

New Zealand

perspective

Page 13: Let's look again at NZ Monetary Policy

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”

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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”

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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”

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What we do by

contrast

Page 17: Let's look again at NZ Monetary Policy

How we destroy our economic sovereignty

NZ money supply increases

This attracts foreign funds

RBNZ Increases Interest Rates

RBNZ Forecasts higher inflation

Consumption increases

House / Farm pricesincrease

Financial Failures

More careless lending

NZ$ exchange rate increases

Carry trade drives up NZ$

Tradable economy stalls

Page 17“Singapore has the answers”

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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”

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Our OCR only effects tradable inflation

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Monetary policy does matter (example)

Money to lend

Where does the bank get the best

return

Floating

Pegged

Managed

X

X

Monetary Policy

Demand for Credit

Asset Appreciates

Yes

No

No

The monetary polices of Korea and Singapore are designed to protect their productive economy

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HONG KONG

SINGAPORE

NEW Z

EALAND

SWIT

ZERLAND

SWEDEN

NORWAY

DENMARK

SOUTH AFRIC

A

AUSTRALIA

TAIWAN

POLAND

CANADA

MEXIC

O UK

KOREA

JAPAN

RUSSIAIN

DIAUSA

BRAZIL

CHINA

0.0

10000.0

20000.0

30000.0

40000.0

50000.0

60000.0

70000.0

Export vulnerability (2007) [D]

=Volume of currency

tradedCountry’s GDP

Value of exportsCountry’s GDP

Country’s GDPWorld GDP

x ÷

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Don’t have our form of monetary policy !

“Singapore has the answers”

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The extent to which NZD is traded (2007)

SWIT

ZERLAND

NEW Z

EALAND

HONG KONG

AUSTRALIA

SINGAPORE

SWEDEN

USA

NORWAY UK

JAPAN

SOUTH AFRIC

A

CANADA

DENMARK

POLAND

MEXIC

O

KOREA

TAIWAN

RUSSIA

INDIA

BRAZIL

CHINA

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

Volume of currency traded

Country’s GDP=

Times GDP

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FX traders love volatility (It’s the US…. yeah right!)

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All measured a % variation against the USD

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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”

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The results….. Business v Housing (excluding agriculture)

Latest Change Decade agoBank lending (Billions) To Individuals 165.4 175.20% 60.1

To Business 87.5 85.80% 47.1

Interest rates Floating Mortgages 6.44% 6.50%Business lending rate 9.85% 7.38%

Asset values (Billions) NZ house values 568 163% 216NZ stock exchange 43.7 -14.50% 51.1

Stock exchange /GDP ratio Australia 92% 95%NZ 24% 49%

House values / GDP ratio Australia 277% 218%NZ 316% 209%

NZ Dollar US dollar 67.2 26.30% 53.2 TWI 62.1 8.90% 57

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Equity matters and it’s 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

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Page 27: Let's look again at NZ Monetary Policy

Banking behavior REALLY matters

• Banks took advantage 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

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Yes we need a bigger Kiwi Bank!

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The scourge of property speculation

• The pyramid selling scheme that is property speculation– doesn’t 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”

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Remove the “poverty tax”

• Bill and Jim work together

• Bill invests in property Jim doesn’t

• 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 doesn’t 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 Jim’s earnings (via tax) has ended up in Bill’s 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.

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Singapore delivers

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Singapore has no natural resources

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Current account gives options

Page 33“Singapore has the answers”


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