RBNZ Monetary Policy Now Formally at War with Itself
The Reserve Bank of New Zealand today went from the sublime to the ridiculous, intervening in foreign exchange markets to sell the NZ dollar. On Friday, NZD-USD reached its highest level since May 1982 at 0.7640, following last week’s decision by the RBNZ to raise official interest rates to 8.00%. RBNZ Governor Bollard said that:
As stated in our June Monetary Policy Statement, we regard current levels of the exchange rate as exceptional and unjustified in terms of the economic fundamentals. This action does not prejudge the future direction of monetary policy, which as always will remain dependent on emerging economic trends. The action is consistent with clause 4(b) of the Policy Targets Agreement, which requires monetary policy to avoid unnecessary instability in the exchange rate.
The claim that the NZD is over-valued in the current environment only makes sense if one believes that there is a much broader misalignment in multilateral exchange rates. The NZD’s dollar bloc peers, the Australian and Canadian dollars, are also making 18 and 30-year highs respectively. The NZD is in fact responding to fundamentals largely of the RBNZ’s own making. The exchange rate is “exceptional by historical standards” because the RBNZ’s official cash rate is also at record highs and threatens to go higher.
RBNZ monetary and exchange rate policy are now formally working at cross-purposes, with the RBNZ raising interest rates on the one hand, while seeking to offset the implications of higher interest rates through intervention in foreign exchange markets on the other.
The RBNZ has historically taken a laissez-faire approach to the exchange rate. But after Bollard became Governor, he sought a re-capitalisation of the Bank to facilitate intervention in foreign exchange markets. So far, the intervention has been a failure, with NZD-USD still holding above levels that prevailed before last week’s tightening. This is despite the intervention being timed to capitalise on thin market conditions brought about by a public holiday in Australia. While there is no technical limit on the ability of a central bank to weaken its own currency, this is only possible when monetary and exchange rate policy work together. When monetary and exchange rate policy are at cross-purposes, it is monetary policy that invariably wins.
Far from reducing volatility in the exchange rate, RBNZ intervention in the foreign exchange market will only serve to increase it. In recent years, NZ monetary policy has become increasingly incoherent. The RBNZ’s Statements on Monetary Policy, once a model for central banks around the world, increasingly have an Alice in Wonderland quality, with the RBNZ making key operating assumptions about the exchange rate and its relationship with monetary policy that simply have no credibility.
posted on 11 June 2007 by skirchner in Economics, Financial Markets
(1) Comments | Permalink | Main
Mundell’s Long View on the US Dollar
Nobel laureate Robert Mundell’s long view on the big dollar:
HONG KONG—As the audience at the Asia Society’s May gala dinner here sips their coffee, the moderator allows one more question from the audience for Nobel economics laureate Robert Mundell. A Chinese gentleman stands to ask how much longer the U.S. dollar would remain the world’s reserve currency. The query seems like the perfect set-up for the world’s foremost expert on monetary policy and a well-known “friend of China” to predict the rise to pre-eminence of China’s currency.
Instead, Mr. Mundell says that China is still far behind the U.S. in economic strength and stability. “I think the dollar era is going to last a long time . . . perhaps another hundred years.”
Nouriel Roubini’s worst nightmare.
posted on 09 June 2007 by skirchner in Economics, Financial Markets
(0) Comments | Permalink | Main
Deregulating Prediction Markets
Andrew Leigh and Justin Wolfers call for the deregulation of prediction markets in their Melbourne Review article:
In Australia, the legal environment has prevented prediction markets from establishing themselves in most States. In addition, there is a concern that, for major bookmakers such as Centrebet, trading on economic derivatives would bring them into conflict with the Australian Stock Exchange and the Australian Futures Exchange. Since Australian betting agencies already handle significant sums of money for elections and major sporting events, relaxation of the regulation governing such markets would bring little risk but a significant public benefit.
Unfortunately, the (now merged) ASX and SFE would probably resist the expansion of prediction markets. Given the SFE’s failure to generate interest in many of the futures contracts it offers, it is hard to imagine it being very enthusiastic about increased competition from new prediction markets offering new products. As in the US, incumbent exchanges and gaming interests, as well as restrictions on cross-border financial transactions, are likely to stand in the way of further development of prediction markets.
posted on 08 June 2007 by skirchner in Economics, Financial Markets
(0) Comments | Permalink | Main
Do Markets Care Who Chairs the Central Bank?
According to this paper by Kuttner and Posen, they do. Once again, the RBA, or more specifically, former Governor Bernie Fraser, serves as an influential observation in this study:
One puzzling result involving the bond yield is that there is a significant market reaction for the non-newsworthy subsample, which is meant to consist only of appointments that were widely anticipated ahead of time. At first glance, this seems to contradict the proposition that the market should respond only to new information. An inspection of the individual responses in table 2 reveals that this anomalous response can be traced to two observations: Australia’s 1989 appointment of Bernie Fraser and Norway’s 1996 appointment of Kjell Storvik. Both of these were classified as anticipated appointments, based on the press reports, and yet, both were associated with pronounced bond market responses. Yields rose 15 basis points (two standard deviations) on Fraser’s announcement and fell 19 basis points (over four standard deviations) on Storvik’s.
In Fraser’s case, the reason for the unusual reaction is relatively clear. The likely choice of Fraser, the sitting Secretary of the Treasury, had been criticized in the weeks prior to the announcement as an appointment that would predispose the Reserve Bank of Australia (RBA) to yield to political pressure for more accommodative monetary policy. And, while Fraser was widely viewed as the clear front-runner for the job, there was some speculation that Bob Hawke’s government would back away from its preferred candidate and appoint instead one of several viable candidates from within the RBA. Thus, the adverse market reaction provoked by the announcement suggests Fraser’s appointment was not thought to be entirely certain. Reclassifying the appointment as newsworthy along these lines would make the bond market’s reaction significant at the five percent level for newsworthy events and not significant for non-newsworthy events, thus eliminating one minor anomaly in the results.
posted on 31 May 2007 by skirchner in Economics, Financial Markets
(0) Comments | Permalink | Main
Sad, But Probably True
Justin Wolfers, quoted in American.com:
I could do the same work I’m doing now for an Australian institution, and the truth is, no one would listen.
posted on 26 May 2007 by skirchner in Economics, Financial Markets
(0) Comments | Permalink | Main
The Economy and the Polls: A Rational Choice Perspective
Australia’s incumbent federal Coalition government is struggling in the opinion polls ahead of this year’s federal election, despite some of the strongest economic conditions in the post-war period. Treasurer Peter Costello likes to boast of his role in ‘managing a trillion dollar economy.’ As Andrew Leigh notes, we must have all missed Australia’s transition from a market to a planned economy! It is likely that voters are aware of this distinction, even if Peter Costello is not.
There is some evidence to suggest that economic data has predictive power for the incumbent two-party preferred vote share at the federal level. Yet rational choice theory would also lead us to expect the two main parties to fully endogenise the preferences of the median voter ahead of the federal election. The modifications that both parties have made to their industrial relations policies in recent weeks are consistent with the predictions of the median voter model. Opposition leader Kevin Rudd’s claim to be a ‘fiscal conservative’ is similarly an attempt to endogenise the preferences of the median voter. Rudd’s political skill lies largely in not differentiating himself from the federal government, unlike former leader Mark Latham, who actively sought to differentiate himself on issues such as school funding and health.
This model still fails to explain why the opposition should enjoy such a strong lead in the polls, since the model is more consistent with voter indifference, with actual election outcomes a random walk. However, it is noteworthy that betting and prediction market pricing of the election seems closer than that suggested by the opinion polls. As Bryan Palmer notes:
The book makers are saying that if the same 2007 Federal election were repeated 20 times, John Howard would expect to win 9 elections and Kevin Rudd would expect to win 11. It is still a close contest.
As Andrew Leigh’s research has found, markets such as these may have better predictive power for election outcomes than opinion polls and economic data.
From the perspective of a rational voter, there are few substantial differences between the Coalition and Labor on monetary and fiscal policy and a diminishing amount of product differentiation on industrial relations. Since the last federal election, it is also likely that voters have learned that international and cyclical influences are more significant in the determination of interest rates than anything the government might do with the federal budget balance.
posted on 24 May 2007 by skirchner in Economics, Financial Markets, Politics
(1) Comments | Permalink | Main
China’s Monetary and Exchange Rate Policy
Ahead of the US-China Strategic Economic Dialogue, Matthew Slaughter explains why the preoccupation with China’s managed exchange rate regime is misplaced:
Economic theory and data are very clear here on two critical points. Controlling a nominal exchange rate is a form of sovereign monetary policy. And monetary policy, in turn, has no long-run effect on real economic outcomes such as output and trade flows.
Like all other central banks, the People’s Bank of China uses its monopoly power over minting its money to control one nominal price. Since 1994 the PBOC has chosen to closely target the dollar-yuan price. In recent times, maintaining this target has required the PBOC to print yuan to buy dollars and thereby accumulate dollar-denominated assets on its balance sheet…
In a counter-factual world where over the past decade China allowed the yuan to float against the dollar, the U.S. would still have run a large and growing trade deficit with China. The real economic forces of comparative advantage that drive trade flows operate regardless of which nominal prices central banks choose to fix.
As this paper from the Bank of Japan explains in detail, China’s money market operations are largely subordinate to the requirements of its managed exchange rate regime.
posted on 22 May 2007 by skirchner in Economics, Financial Markets
(1) Comments | Permalink | Main
The Politicisation of the Future Fund
The Future Fund has barely invested a single cent and yet it is already the target of rent-seeking in relation to its basic administrative arrangements, such as its choice of custodian. The Future Fund’s investment decisions will be the subject of even greater scrutiny, especially following Chairman David Murray’s recent suggestion that the Fund would seek to invest in private equity. This scrutiny will necessarily be after the fact, given the lack of transparency around the Fund’s investment process. By creating an asset portfolio subject to public ownership and control, the Future Fund will increasingly become a focus for distributional conflict and rent-seeking.
posted on 22 May 2007 by skirchner in Economics, Financial Markets
(1) Comments | Permalink | Main
The World Bank is the Scandal, Not Wolfowitz
A Bloomberg podcast interview with CMU’s Adam Lerrick on the World Bank.
posted on 19 May 2007 by skirchner in Economics, Financial Markets
(2) Comments | Permalink | Main
More Currency Speculation from Warren Buffett
Warren Buffett is back making currency bets, although this time is saving himself the embarrassment of revealing what they are:
Warren Buffett, perhaps the world’s most influential investor, sent the foreign exchange markets scrambling this week after revealing that he had made a “surprising” new bet on the currency markets.
Mr Buffett added to the intrigue by indicating he was only actively buying one currency. “We will tell you about it next year,” he said.
At first glance, the Sage of Omaha is not taking his own advice. “The cemetery for seers has a huge section set aside for macro-forecasters,” he once said…
Mr Buffett’s Berkshire Hathaway did make more than $2bn overall on a $20bn-plus bet against the dollar that began in 2002, even after the market moved against him to the tune of $1bn in 2005. But he has phased out most of the direct bet – which had started to cost money to hold – in favour of investments in companies with sales in other currencies…
Perhaps the most surprising call for him would be to reverse his bearish stance on the dollar.
Paul Mackel, currency strategist at HSBC, says it is possible that Mr Buffett thinks that US economic growth could accelerate, and has bought the currency.
Ultimately, though, Mr Mackel says that Mr Buffett’s views on currencies are unlikely to carry as much weight as his views on companies.
“His currency calls do generate a lot of headlines, but I’m not sure quite how seriously people take it,” adds Mr Mackel.
posted on 19 May 2007 by skirchner in Economics, Financial Markets
(1) Comments | Permalink | Main
Another Wooden Spoon for the Reserve Bank
The Reserve Bank of Australia typically scores poorly in cross-country rankings of central bank transparency and accountability. It can now add to its collection of wooden spoon awards bottom place in JP Morgan’s index of central bank communication. Indeed, the RBA is such an outlier that it single-handedly establishes a significant relationship between the JP Morgan index of central bank communication and at least one of their measures of interest rate forecast errors.
Of course, the fact that the RBA serves as an influential observation in this study only serves to highlight the more general conclusion from this and other studies, that there is typically not a robust relationship between measures of central bank transparency and measured market volatility. This does not, however, negate the purely procedural case for increased transparency and accountability on the part of the RBA.
posted on 17 May 2007 by skirchner in Economics, Financial Markets
(0) Comments | Permalink | Main
Ken Henry’s Supply-Side Economics
Treasury Secretary Ken Henry has previously argued that the Australian economy is operating in a classical world and his emphasis on the supply-side of the economy puts him squarely within the classical tradition. This is why analysis of the federal budget in terms of Keynesian demand-management is so misplaced. The ‘tax cuts lead to higher interest rates’ brigade simply fail to understand what is driving fiscal policy.
Henry’s traditional post-Budget address to Australian Business Economists reiterated some of the main themes in the Budget papers, including this analysis of the supply-enhancing implications of the government’s tax cuts:
The Treasury’s participation modelling project has the capability to assess the impact on labour supply (or potential labour utilisation) of tax-transfer policy changes in particular. We have run last week’s tax cuts through our version of the Melbourne Institute Tax and Transfer Simulator (MITTS). Most of the positive impact on labour supply comes from the increase in the 30 per cent threshold from $25,000 to $30,000 – including the labour supply response of many secondary earners. The increases in LITO and the 40 per cent and 45 per cent thresholds are also positive for labour supply, though smaller. And the increase in the dependent spouse rebate is estimated to produce a very small negative impact on labour supply.
Overall, we calculate that the Budget tax cuts might increase labour supply by about 0.1 hours per week. If this additional supply is fully employed, the increase in labour utilisation will lift the employment ratio by about a third of a percentage point.
But there is another way of looking at this. The increase in labour supply expands potential GDP in the same way as a cut in the NAIRU does. As a rough approximation, an increase in labour supply of 0.1 hours a week would have about the same impact on potential GDP as a cut in the NAIRU of half of a percentage point – quite a significant amount.
The package of tax cuts announced in last year’s budget, and in particular the increase in the 30 per cent threshold from $21,600 to $25,000, would have added about another 0.1 hours a week to labour supply. Thus, over two budgets, the increase in this threshold could have an impact on potential GDP broadly equivalent to a one percentage point cut in the NAIRU.
Changes to child care arrangements announced in last week’s budget can also be expected to make a positive contribution to labour supply. Coming on top of the earlier welfare-to-work measures and the superannuation changes announced in last year’s budget, we have had quite a significant policy-induced boost to the economy’s supply capacity.
posted on 15 May 2007 by skirchner in Economics, Financial Markets
(2) Comments | Permalink | Main
The Anti-Capitalist Origins of the Foundational ‘Bubble’ Myth
A review of Anne Goldgar’s Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age, which discusses the anti-capitalist origins of the foundational ‘bubble’ myth:
Some contemporary pamphleteers attacked the trade, baffled by what one Englishman called the “incredible prices for tulip rootes”, and disquieted by the godless materialism of it all. They feared, wrongly, that the trade subverted the social order by making poor people rich. As almost no other contemporaries wrote about tulipmania, these biased pamphlets informed most later accounts.
Most tulip tales we know, scolds Goldgar, “are based on one or two contemporary pieces of propaganda and a prodigious amount of plagiarism”.
posted on 13 May 2007 by skirchner in Economics, Financial Markets
(0) Comments | Permalink | Main
Pop! Why Bubbles Are Great for the Economy
Dan Gross presents a summary of his book, Pop! Why Bubbles Are Great for the Economy. Jason Potts does a much better job making much the same argument here, locating the case for ‘bubbles’ squarely within the Austrian market process tradition.
I would argue that the term ‘bubble’ has no analytical content. More often than not, it is used tautologically as a description of asset price behaviour, while offering no insight into the process by which asset prices are determined. Peter Garber’s Famous First Bubbles shows how the idea of ‘bubbles’ in asset markets rests on very shaky historical and intellectual foundations that drive the widespread popular misuse of the term today.
posted on 10 May 2007 by skirchner in Economics, Financial Markets
(0) Comments | Permalink | Main
Tax Cuts & Interest Rates: Round Up the Usual Suspects
Actually, there are very few members of the economic commentariat arguing that tax cuts will lead to higher interest rates in response to this year’s federal budget. Even Wowser Ross was forced to concede that the budget would not put upward pressure on interest rates, while Brian Toohey in the AFR (unlinkable) argued that ‘at least the tax cuts can be seen as having some incentive effect.’
Part of the reason is that in the Budget papers, the Treasury makes explicit the links between tax cuts and increased labour supply, going so far as to quantify the expected impact of the tax cuts on labour force participation. This puts the commentariat in the position of having to argue against Treasury numbers, something few of them are brave enough to do. Since many of the economics writers in the mainstream press rely on wholesale recycling of Treasury speeches and other research as the basis for their columns, they are not about to start arguing with one of their favourite sources. The fact that the tax cuts are aimed at low income earners also helps, since few are prepared to argue against tax cuts for the low paid. Tax cuts for the ‘rich’ would have been a different story.
The fiscal impulse between 2006-07 and 2007-08 is a small 0.3% of nominal GDP. Some will make the argument that the timing of budget measures makes the short-run stimulus larger, but this misses the point of what has been happening with the budget balance in recent years. The main problem faced by the government has been to avoid what would have been a large fiscal contraction induced by above forecast revenue collections. Recent budgets have largely been aimed at keeping the fiscal impulse steady, by returning some of this increased revenue in the form of tax cuts and increased spending. This is a phenomenon the RBA has also noted, which is one of reasons it has not been bothered by fiscal policy in recent years.
The most salient aspect of fiscal policy is that the government has been raising much more revenue that it needs to fund recurrent expenditure. This government is in the process of accumulating a large negative net debt position, to the tune of nearly 5% of GDP by 2010-11. Hence the advent of the Future Fund to manage these assets. The Future Fund concept has now been extended to include a higher education endowment.
We know from the prospective fiscal gap identified in the most recent Intergenerational Report that, on a no policy change basis, federal spending will eventually outstrip revenue. The solution to this problem is not to hoard revenue now, but to grow the economy faster today, while restructuring federal tax and spending programs to put them on a more sustainable long-term footing. This is the basis on which fiscal policy should be assessed, not its largely imaginary implications for interest rates.
posted on 09 May 2007 by skirchner in Economics, Financial Markets
(4) Comments | Permalink | Main
Page 38 of 45 pages ‹ First < 36 37 38 39 40 > Last ›
|
