The senior research staff of the IMF has published an assessment of world macroeconomic policy over the past 20 years and found it sadly wanting. In fact the obsession with achieving low inflation using ‘policy’ interest rates may well have caused the crisis, and certainly has made overcoming it more difficult.

BERL Director Kel Sanderson said “the IMF staff’s assessment makes the same points that BERL has stressed consistently since the hearings on the Reserve Bank Bill in the late-1980s. Since then BERL has been promoting balanced policies with foresight, now the IMF senior staff finds that to be correct in hindsight”, said Sanderson.

The policy mantra since the late 1980s has followed a narrow path. The IMF’s assessment noted three facets of that mantra that are now, apparently, under question.

1.‘Stable and low inflation is good in itself and good for economic activity’. This is achieved using a single instrument, the interest rate. The difficulty when the bubble burst has been that as that rate of interest approached zero there was no further monetary policy ability to stimulate economies to avoid depression.

2.‘There is a limited role for fiscal policy’ because this implies political intervention in the economy. We have been very thankful for fiscal intervention when the finance sector collapsed.

3.‘Financial regulation is not a macroeconomic policy tool.’ There has been great enthusiasm for financial deregulation, and so the ‘purists’ have maintained that introduction of any prudential regulation is improper meddling with the functioning of the credit markets. Who now does not wish the central banks had been doing some meddling before the toxic balloon inflated?

At the last 2008 review of monetary policy in NZ, BERL called for a Benefit-Cost Analysis of the operation of monetary policy over the last 20 years. The IMF paper asks rhetorically whether the net costs of inflation are greater at, say, 4% than at 2%? They question whether the costs are outweighed by the potential benefits.The IMF senior staff conclude, as BERL has argued previously, that there is a need for the combination of traditional monetary policy and regulation tools, as well as some automatic crossover with fiscal policy to achieve stability and economic growth. “The crisis has made clear that policymakers have to watch many targets ... and have many more instruments at their disposal than they used before the crisis.”

Sanderson poses the question “Will NZ policymakers now explore the IMF’s ‘Rethinking’, or will their response, as in the past be that it is politically too difficult or that it may reduce our credit rating?”

BERL Chief Economist Dr Ganesh Nana adds, “We await NZ’s leadership to acknowledge that our ‘world’s best practice policy framework’ is now being deserted by some of its most ardent supporters. Perhaps it is time for NZ’s policy framework to undergo a ‘rethink’ as well”.

The IMF report we are referring to can be found here.