Professor Robert MacCulloch: The Chancellor of AUT and monetary policy

I can't understand the Chancellor of AUT (and former Chair of Health NZ) Rob Campbell's explanations as to how monetary policy works

The Chancellor of the Auckland University of Technology (and former Chair of Health NZ) is becoming a prolific writer, explaining to all and sundry on platforms like Newsroom how economics works. The thing is, I can't understand many of these explanations. Take his latest comments which question the way monetary policy is being conducted in NZ.

He says, "The important question is whether independent monetary policy with a primary focus on, and acting as the main instrument for, controlling inflation is the best choice available. There are a number of assumptions to the theory which underpins such monetary policy. It is not at all clear that these hold for this economy in this period .. The theoretical assumptions accord a neutrality to monetary control which is questionable in any circumstance, but even more so in a financial market with the characteristics which apply here & now, and an economy facing long-term fiscal, investment, social and environmental challenges".

Our monetary policy objective, which is presently focused on reducing inflation, does not assume a "neutrality of money". That is why the Reserve Bank's objective is not to reduce inflation right now, but instead only over the "medium term". The RBNZ will not put up interest rates to 20% today to squash inflation in one week's time. Because it would crush business, crush investment, cause a meltdown for those with a mortgage, unemployment to skyrocket, as well as worsen a bunch of other outcomes. So our existing framework is not built on an assumption money & interest rates are "neutral" - it is built on an assumption they have profound effects on output right now (in the "short-run"). They are only neutral in the medium to long term, where their primary effect is on prices, not on output. One of the most famous names in world economics is the late Bill Phillips, a Kiwi, who is still known by every economist today. He used to work at Auckland University & invented the "Phillips Curve". It is because of this relationship that we know crushing inflation with extreme urgency today would have many bad outcomes, like higher unemployment. A former RBNZ Governor, called Alan Bollard, wrote a book on his life. Bill Phillip's famous relationship is called a "principle of economics" in the world's best-selling student textbook & is why our Reserve Bank Act says price stability is only a medium-term objective. If is from the Phillips's curve that we know changing money & interest rates are not "neutral" in terms of their short run effects. Where Mr Campbell got his line, "the theoretical assumptions" which underlie NZ's monetary policy "accord a neutrality to monetary control which is questionable in any circumstance, but even more so .. here & now" is not something I pretend to understand.

Sources:
https://www.legislation.govt.nz/bill/government/2023/0002/latest/LMS926941.html
https://newsroom.co.nz/2024/07/01/time-for-an-inflation-rethink/

Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.