Friday, September 10, 2010
Vital Statistics
14 Sep 2007
BERL urges inflation control to take a back seat to other goals
Kel Sanderson
In its submission to the Inquiry into the Future Monetary Policy Framework BERL encouraged the Finance and Expenditure Select Committee to take note of the costs of inflation control.
“As there is no stated requirement to account for the cost of an over-zealous pursuit of an inflation target, there is no transparent balancing of the benefits of monetary policy actions against the costs of such actions."
“Ideally, we need to be slightly more relaxed in our attitude with inflation control. This would enable the country to make more progress against the other economic objectives, like real incomes, productivity, and the balance of payments."
“Indeed, the pursuit of stringent monetary conditions has led to perverse effects on house prices. Higher New Zealand interest rates have seen funds being increasingly attracted to New Zealand. This has bolstered the home loan market and so acted to further increase house price inflation. The costs of this perverse cycle have been borne by activities in the external sector, as the NZ$ exchange rate rose. That the external sector is being sacrificed in the pursuit of perceived imbalances in the New Zealand housing market just adds to the perversity of the situation,” stated the economists.
In summary, we submit that in announcing monetary policy actions to control inflation, officials clearly report:
a) the assessed benefits - in terms of the degree to which inflation will be lower and the benefits therefrom - as a result of the announced action;
b) the assessed costs - in terms of the impact(s) on the capacity of productive resources to deliver on the primary goal of economic policy - as a result of the announced action; and
c) the assessed degree to which the above benefits exceed, or fall short of, the above costs and how such an assessment was determined.
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