Wednesday, 9 November 2016

An unfortunate coincidence

Next year will see an unfortunate coincidence of timing. The five year term of Graeme Wheeler as governor of the Reserve Bank, and the associated Policy Target Agreement, will run out in September, which is likely to coincide with the height of the general election campaign: the vote must be held by November 18 at the latest.

It was a high probability in any event that our monetary policy arrangements would, yet again, be a political football. Opposition parties (as I've observed before, most recently here) have been wholly unable in recent elections to refrain from reflex oppositionism - "if the government is for inflation targeting, we're against it" - or from running after the alternative fad du jour.

The timing makes a rerun of this dispiriting opportunism a certainty: whether Graeme Wheeler stays or goes, a new contract for the RBNZ governor triggers (under s9(1) of the Reserve Bank Act) a new Policy Targets Agreement. The key bit of the existing one - "the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint" - will be up for grabs.

I wouldn't be surprised if the Act itself doesn't get a headbutting, too, especially s8 which says "The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices". There are plenty of folks who'd like to revisit that, too, and lumber the Bank with other or additional objectives.

My own strong preference would be to leave the big ticket bits of the existing arrangements alone, as, for example, the Aussies did a few months ago when they signed up for more of the same under their new RBA governor, Philip Lowe. But you don't have to take my opinion (or the Aussies' decision) for it: it had slipped under my radar, and I only got alerted to it by a colleague in a conversation about something else, but in September the Bank of Canada (BoC) also announced that it was going to carry on with its current inflation targeting regime, and that it was going to stay with an inflation target of 2%, as the midpoint of a 1% to 3% range.

Why should we care about the Canadians?

Firstly, because the BoC was one of the earliest banks to go the inflation targeting route - second only to us, as it happens. We kicked off in late 1989 and they joined the line-out in February 1991. They're the major central bank with the longest experience in the inflation targetting game. So if they've decided the inflation targeting route is still the way to go (they've signed up for at least five more years of it), and that 1% to 3% with a focus on 2% is still sensible, then it rather suggests that we ought to keep on doing it, too.

And secondly, because the BoC actually spent quite a lot of time kicking the tyres of potential alternatives, and flagged them away. If you want the short version, this letter from the BoC governor to the Minister of Finance covers it (in the 'Related issues' bit): neither targeting nominal GDP, nor targetting a price level (rather than an inflation rate), which are the two leading alternatives in the frame at the moment, looked better than the current inflation targeting regime. If you want to look at the detailed research programme it's all here.

So I'm minded to say: let's free ride on the BoC's research, and do what they've done. As the BoC governor said in this speech
renewing the inflation target is a cause for celebration... 
We have studied the research and the theory behind frameworks such as price-level targeting and targeting the growth of nominal gross domestic product. But, to date, we have not seen convincing evidence that there is an approach that is better than our inflation targets...
The renewal of our inflation-targeting agreement is good news. Whether you remember the bad times or not, high, variable and unpredictable inflation is deadly for confidence. It is a source of uncertainty that would be brutal in today’s economic climate. 
We will not let that happen. We have a record of more than 25 years as a successful inflation-targeting central bank. This has helped businesses and individuals make financial decisions with certainty and confidence. It has led to an environment that is conducive to sustained economic growth.
The renewal of the inflation-targeting agreement sets us up to extend this track record of success for another five years.
We should, of course, keep questioning our own arrangements, as the Canadians just have, and with a genuine interest in improvement rather than as a cheap political stunt. But all the evidence is that what we, and they, and the Aussies, have got is still the best way to go.

Not that I expect for a second that the weight of evidence is actually going to count a bean against the next round of silliness.

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