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  • rmacculloch

Can anyone understand the Chancellor of AUT (and former Chair of Health NZ) Rob Campbell's explanations as to how monetary policy works?

The Chancellor of the Auckland University of Technology (and former Chair of Health NZ) is becoming a prolific writer, explaining to all and sundry on platforms like Newsroom how economics works. The thing is, I can't understand many of these explanations. Take his latest comments which question the way monetary policy is being conducted in NZ. He says, "The important question is whether independent monetary policy with a primary focus on, and acting as the main instrument for, controlling inflation is the best choice available. There are a number of assumptions to the theory which underpins such monetary policy. It is not at all clear that these hold for this economy in this period .. The theoretical assumptions accord a neutrality to monetary control which is questionable in any circumstance, but even more so in a financial market with the characteristics which apply here & now, and an economy facing long-term fiscal, investment, social and environmental challenges".

Our monetary policy objective, which is presently focused on reducing inflation, does not assume a "neutrality of money". That is why the Reserve Bank's objective is not to cut inflation right now, but instead over the "medium term". The RBNZ will not put up interest rates to 20% today to squash inflation in one week's time since it would crush investment, cause a meltdown for those with a mortgage, unemployment to skyrocket & worsen many other outcomes. Consequently our existing framework is built on an assumption money and interest rates do have profound effects on output now (the "short-run"). They are only neutral in the medium to long term, meaning their primary effect is on prices, not output. One of the biggest names in economics is the late Bill Phillips, a Kiwi, who is still known by every economist in the world today. He used to work at Auckland University and discovered the Phillips Curve. It's because of this relationship that we know crushing inflation with extreme urgency today by hiking interest rates would have many bad "non-neutral" outcomes, like a recession & unemployment. A former RBNZ Governor, Alan Bollard, wrote a book on his life. Phillip's relationship is called a Principle of Economics and is the reason that our Reserve Bank Act says price stability is only a medium-term objective. Why Mr Campbell says, "the theoretical assumptions" which underlie NZ's monetary policy "accord a neutrality to monetary control which is questionable in any circumstance, but even more so .. here & now" is not something I pretend to understand.



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