The Reserve Bank Governor, Adrian Orr, stated earlier this year he was "engineering a recession" to get inflation down at a Parliamentary Finance & Expenditure Committee hearing. What is a recession? A time of falling GDP & rising unemployment. The Governor said he wanted this scenario to occur, the reason being higher unemployment puts downward pressure on wages, quelling inflation. The RBNZ has succeeded. Negative growth & rising unemployment is the situation in NZ at present.
Now the following matter comes to my attention through a speech MP Chloe Swarbrick gave in Parliament last week (on 12 December) during a debate on the Reserve Banks' aims. Chloe quoted from another of the Governor's answers to the Finance & Expenditure Committee, this time to a question about whether changing the Bank's aim away from the dual mandate (inflation & employment) to the single mandate (inflation only) would have made a difference to its past interest rate decisions. He replied: "No is the answer. We haven't come across any trade-offs of employment versus inflation. There is no conflict".
The first statement that the RBNZ must "engineer a recession" to get inflation down asserts there is a conflict at work. It is saying that the more interest rates are pumped up, the faster inflation will fall, but the more GDP & employment will drop, and unemployment rise. The second statement, however, says that no trade-off exists; that there "is no conflict".
The RBNZ wrongly advised the Finance & Expenditure Committee, confused Parliament & embarrassed National, ACT & NZ First by giving the Coalition unflattering headlines in the media based on false premises. The Governor's second statement contradicts his first. It was used by Chloe to make Finance Minister Willis look incompetent.
What does US Treasury Secretary Yellen have to say about this matter? She repeatedly argued when Chair of the US Federal Reserve that there is a trade-off and, as a result, she favoured "soft landings" - that is, smaller hikes in interest rates even though inflation stays higher for longer, since employment would fall by less. She referred to the trade-off - the short-run conflict between inflation & employment - as being part of an "optimal control problem". George Akerlof, the Nobel Laureate, called the trade-off "probably the single most important macroeconomic relationship". Nobel Laureates Paul Samuelson & Robert Solow, also argued such a trade-off exists. Although the trade-off has changed over time and been unstable, Harvard Professor Greg Mankiw states that it is "always out there, lurking ... Yes, there is a trade-off between inflation & unemployment".
For Orr to formally state that there "is no conflict" - no "trade-off" - between the aims of high employment and low inflation - and argue at the same time that one needs to "engineer a recession" to get inflation down - is in my view an unforgiveable mistake for a Central Governor to make. Especially when his views were repeated in Parliament and influenced the new Reserve Bank legislation that has become world news.