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  • rmacculloch

The NZ Treasury has Misled the New Government & failed National Cert. of Educ. Achievement Economics

Today the new government has started the process of changing the law so the Reserve Bank's single focus will be on price stability, rather than its present "dual mandate" of both price stability and higher employment. Why? Because those advocating for a "single mandate" emphasize the costs of inflation over time.

In the short-run, the supporters of a single mandate prefer getting inflation down quickly, even though unemployment may go up. The world's best selling economics textbook by Harvard Professor and (former) Chair of US President's Council of Economic Advisers, Greg Mankiw, states as the "Tenth Principle of Economics":

Society faces a short-run trade-off between inflation and unemployment.

Ironically, this trade-off was discovered by NZ economist, Bill Phillips, who became world famous for it. What it means is if inflation is high, like it is now, hiking interest rates more would get inflation down quicker but increase unemployment more in the near-term. This is why our Reserve Bank is not currently putting the Official Cash Rate up even higher. If, on the other hand, inflation & unemployment fell together then hiking the OCR would be more desirable. But good inflation & employment outcomes are misaligned in the short-run.

However, this is what the NZ Treasury has advised the new government in its Regulatory Impact Statement that was leaked and (partly) published today in the media:

"Removing the dual mandate (price stability and maximum sustainable employment) from the Act would be unlikely to alter the general stance of future monetary policy decisions except for in the rare circumstances where these objectives may be misaligned."

Wrong. The circumstances are not rare. They're so common, it has become a "principle" of economics (!) The short-run trade-off between inflation & unemployment exists now, in NZ & every nation. Those folks supporting single mandates favour bigger OCR hikes to combat inflation even though unemployment may go up more in the short-term since they put more weight on getting inflation down fast, which they argue is in the long-run interests of society.

Shame on the Treasury for misleading the PM and Minister of Finance and enabling Newshub to run front page stories to millions of NZ'ers discrediting them by arguing that the new coalition is not following expert advice (the Treasury says the law doesn't need to be changed). Actually, the advice is rotten.


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