Making the boat go faster – Brian Fallow Tips

It is a challenging set of issues the finance and expenditure select committee’s members have set themselves as they embark on their inquiry into monetary policy. Whether they have bitten off more than they can chew remains to be seen.

But they will have to turn their minds to these questions:

  • Has something gone fundamentally wrong with the monetary policy framework since the late 1980s?
  • Were the “give growth a go” changes to the policy targets agreement five years ago a mistake?
  • Monetary policy needs mates, as the saying goes, but have they been letting it down?
  • Or is it just a case of a poor workman blaming his tools?
  • Are we confronting the downside of globalisation or are the problems closer to home?

One person who suspects something has gone fundamentally awry, evidently, is Michael Cullen.

In a speech this month, the Finance Minister said the consensus had been that the monetary policy framework did not have an impact on long-run growth.

“In other words, monetary policy keeps the economy stable by moderating economic cycles without impacting on the sustainable rate of growth,”

he said.

“My overriding concern is that this view no longer holds.”

Even with its recent falls, from a stratospheric US81c, the dollar remains significantly over-valued and has been for much longer than in previous cycles.

The kiwi has been above US70c for less than 7 per cent of the time since it floated in 1985 but it has been above US70c for most of the past three years.

Cullen said the risk was that people decided exporting or investing in exporting was just not worth it.

One of the submitters to the select committee, former Waikato University vice-chancellor and British Labour Party luminary Bryan Gould, warns that, in the long run, regularly recurring over-valuation of the currency could change the culture.

“As a country, we cease to be interested in making new wealth because it is just too hard. Our best brains go into the professions or domestic industries like retailing, where there is less threat from international competition, and shy away from the internationally traded sector where the real prospects for growth lie.”

Other submitters question another basic pillar of the regime, a freely floating exchange rate…

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