New Zealand vs. the RBNZ
Study central bank framework changes and you can see the future; New Zealand is headed in the wrong direction-- Australia is faring much better.
New Zealand may be steaming ahead of the world in bird competitions, but its central bank risks being sent decisively backwards. This week, the country’s newly-elected rightwing government announced it would be moving the Reserve Bank of New Zealand (RBNZ) from a dual mandate (targeting price stability and full employment) to a single mandate.
In my view, this is highly problematic for two reasons: first, it politicizes monetary policy-setting to an embarrassing degree for a country that fancies itself a competent technocracy. And second, it robs the central bank of optionality that will surely be needed before the law is inevitably changed again.
Macro Letter Readers will know that I am no fan of single mandates.1 The most well-known single mandate in effect today is the one in force in the European Union, under which the European Central Bank (ECB) has to ignore things like recessions and unemployment in pursuit of price stability. This makes monetary policy prone to overtightening, contributing to unnecessary recessions and risking deflation— as the Trichet hikes did in 2011 (see the post below for a refresher), and as the last few Lagarde hikes this year risk doing again.
Undergraduate monetarism
The ECB’s single mandate was so good at generating unemployment that I am shocked anyone would want to emulate it. Yet this is precisely what New Zealand’s new government, headed by center-right Prime Minister Christopher Luxon, is trying to do as a concession to the minor coalition party ACT.
To be fair ACT, which won about 8.6% of the votes in the 2023 general election, did have a policy paper on monetary policy that explicitly proposed returning the RBNZ to a single mandate. Unfortunately, it reads like an undergraduate essay (link here). It blames the RBNZ for causing the recent inflationary bout on “too much money chasing too few goods” and a “flood of borrowed and printed cash” with Friedmanite fervor (albeit with none of Milton’s flair).2
Such analysis has its place in high inflationary regimes, such as Argentina, where the currency has lost over 90% of its value since the last election in 2019. But it is clearly out of place in New Zealand— where one New Zealand dollar today will buy you roughly as many United States dollars as it would before the COVID-19 crisis.
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