Labour defended high inflation rates by referencing other countries’ poor records – the “global inflation shock”. Meanwhile, countries like Switzerland, Indonesia, South Korea and Japan maintained lower inflation rates than New Zealand.
In any case, that argument is certainly not true now. GDPLive currently puts inflation in New Zealand at 6% and the September CPI was 5.6% - though half a point will be petrol excise returning. Inflation in the US and Japan has fallen to about 3% and in the Eurozone it is about 4%.
Why was America’s inflation peak almost one percentage point higher than New Zealand’s? Both countries have had massive fiscal expansion, suffered from supply chain issues, faced lower growth from China, and been affected by the Ukrainian war.
There are two key reasons. First, in the US, both expenditure and debt-to-GDP ratio are stable, while in New Zealand, both are increasing. Labour in 2023 was still debt-financing fiscal stimulus and yet, somehow, expected inflation to fall.
Second, in the US, monetary policy was more aggressive in hiking interest rates than in New Zealand. While I have defended the RBNZ’s policy in the past, it missed an important insight from behavioural macroeconomics.
In standard macroeconomic models, agents form rational expectations (they use all available information and understand the state of the economy).
But people learn over time.
Models incorporating learning behaviour have been developed in which agents form and update beliefs about the state of the economy as new data becomes available.
In these models, agents who learn about the state of the economy when experiencing fiscal spending shocks react more strongly than agents who do not learn. This is especially important when inflation is very high.
This insight is crucial for monetary policymakers because it requires a stronger reaction of interest rate hikes to achieve price stability. This happened in the US, where interest rates hit highs not seen for more than two decades, but not in New Zealand.
Voters expressed no confidence in those responsible for fiscal policy: the Labour Party and Finance Minister Grant Robertson.
There should be similar accountability for those who have made severe mistakes in monetary policy: the RBNZ’s Monetary Policy Committee and the Governor.
Dennis is a Senior Lecturer in Economics at the University of Otago, the Vice President of the New Zealand Association of Economists, Editor-in-Chief of New Zealand Economic Papers and Associate Director of the University of Otago’s Economics PhD Programme. This article was first published HERE
Why was America’s inflation peak almost one percentage point higher than New Zealand’s? Both countries have had massive fiscal expansion, suffered from supply chain issues, faced lower growth from China, and been affected by the Ukrainian war.
There are two key reasons. First, in the US, both expenditure and debt-to-GDP ratio are stable, while in New Zealand, both are increasing. Labour in 2023 was still debt-financing fiscal stimulus and yet, somehow, expected inflation to fall.
Second, in the US, monetary policy was more aggressive in hiking interest rates than in New Zealand. While I have defended the RBNZ’s policy in the past, it missed an important insight from behavioural macroeconomics.
In standard macroeconomic models, agents form rational expectations (they use all available information and understand the state of the economy).
But people learn over time.
Models incorporating learning behaviour have been developed in which agents form and update beliefs about the state of the economy as new data becomes available.
In these models, agents who learn about the state of the economy when experiencing fiscal spending shocks react more strongly than agents who do not learn. This is especially important when inflation is very high.
This insight is crucial for monetary policymakers because it requires a stronger reaction of interest rate hikes to achieve price stability. This happened in the US, where interest rates hit highs not seen for more than two decades, but not in New Zealand.
Voters expressed no confidence in those responsible for fiscal policy: the Labour Party and Finance Minister Grant Robertson.
There should be similar accountability for those who have made severe mistakes in monetary policy: the RBNZ’s Monetary Policy Committee and the Governor.
Dennis is a Senior Lecturer in Economics at the University of Otago, the Vice President of the New Zealand Association of Economists, Editor-in-Chief of New Zealand Economic Papers and Associate Director of the University of Otago’s Economics PhD Programme. This article was first published HERE
1 comment:
“The Cantillon Effect”
In a nutshell, when money is created or added to an economy, the people who receive it first, benefit, but they do so to the detriment of everybody else.
The early recipients of new money were able to spend it on accumulating more of the productive assets that society had to offer. But this also increased the money supply, which diluted the purchasing power of everybody else’s existing money.
The wealthy got to invest new money.
Everybody else had to spend more of their existing money.
So, while the rich got richer, it made it more expensive for the poor to stay alive.
All by design!!
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