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Labour's finance spokesman David Parker likes what he heard from the IMF chief economist, especially on currency intervention

Labour's finance spokesman David Parker likes what he heard from the IMF chief economist, especially on currency intervention

By David Parker*

I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.

Olivier Blanchard says:

Overvaluation of exchange rates “can be very damaging and we can need interventions to deal with such outcomes.”

We “need a twist to monetary policy”.

Friction in the wheels of capital flows make exchange rate interventions work better.

Our third to last meeting was with Olivier Blanchard, Chief Economist at the IMF.

If any further evidence is needed of how far the world has moved on as a consequence of the limitations and side effects of inflation targeting exposed by the GFC, then writing out of the IMF since should suffice.

The most senior of economists in powerful positions write and talk in accessible language. They don’t use jargon as a barrier to discussions and are genuinely interested in our experiences, as well as interested in offering their own views.

Olivier Blanchard is one such man. He is both erudite and engaged. He was taking notes, as we were.

In advance of the meeting I had read the book “In the Wake of the Crisis – Leading Economists Reassess Economic Policy” edited by Olivier Blanchard, David Romer, Michael Spence, and Joseph Stiglitz. I recommend the book.  Those like Steven Joyce who superficially defend the status quo - and accuse me and others who have challenged it as voodoo economists - could benefit from reading it.

The preface, first chapter and concluding remarks are by Olivier. Read as a whole, there can in my view be no doubt that inflation targeting has been exposed as seriously deficient.

Page one of the preface asks: Is inflation targeting the right way to conduct policy, or should the monetary authority watch a larger set of targets? ... Should there be limits on current account imbalances? ... Should countries use capital controls? ... Should there be better mechanisms to deliver global liquidity? ...

The book addresses these issues by presenting contributions from 23 leading economists, all of whom present their critiques in less than 10 pages.

A number refer to how developing countries and increasing numbers of developed countries are intervening to influence their currencies. The old view that you lose control of inflation if you address currency is debunked by a number of the contributors from both developing and developed countries. See for example the chapters by Guillermo Ortiz (Mexico) and Rakesh Mohan (Yale, and former deputy governor of the Reserve bank of India).

Mohan says sound economic management requires a combination of sound macroeconomic policies (both fiscal and monetary), plus exchange rate flexibility with some degree of management, and a relatively open capital account, but some degree of management and control is needed.  This balanced approach is referred to with approval by Olivier in his concluding chapter.

The enormous blind spot in central bank policy around the world – which largely ignored asset price bubbles - receives repeated criticism.

Some, like Stiglitz, think central banks were, and are, largely populated by, and captured by, the interests of bankers. Labour’s policy of broadening the membership of the Board of the Reserve Bank to include the interests of exporters and labour will help remedy this, as will the broadening of objectives. (Given the Stiglitz view that the consequences of monetary policy are disproportionately visited upon the vulnerable, maybe we should add representation of women, who so often bear the consequences of adversity-facing families).

Otmar Issing (Goethe University, Frankfurt) points out that it cannot be right that central banks intervene asymmetrically to deal with asset prices, ie only when they go down.

“All concepts of inflation targeting are based on inflation forecasts in which money and credit do not play an active role. They are a passive  part of the forecast but are irrelevant once it comes to monetary policy decisions. ... [Central banks had the view that they] should not target asset prices, should not prick a bubble, and should follow a mop-up strategy after a bubble has burst. ... If asset prices collapse after a bubble bursts, then the central bank come to the rescue ...”

Olivier agreed the one-way interventions by central banks have distorted asset prices (which is not to say that he opposes current central bank interventions to support economies).

Stiglitz noted monetary policy has protected bond and asset values for a subset of the population, while inflation targeting has visited the costs of readjustments caused by higher interest rates in other parts of the cycle upon the unemployed, the under employed and wage workers.

The themes of credit expansion and asset bubbles was emphasised by Olivier Blanchard when we met. Reserve banks post the GFC are starting to use prudential tools not just to protect the financial sector from collapse, but also to influence economic outcomes. He thought the separation of interest rate decisions from so-called prudential measures “is arbitrary”. I agree – which is one of the reasons we in the Labour party support the decisions on both prudential rules and interest rates being integrated and being for the board, not the GBvernor.

As Issing said in his chapter, price stability and financial stability must not be seen as a trade-off. Stiglitz puts it slightly differently, he says that the huge societal consequences of financial imbalances/collapses ought never be subjugated to a narrow focus on inflation.

I would add that even short of financial instability, a setting which sees little problem in the country’s balance sheet getting worse and worse through prolonged current account deficits (funded by asset sales to foreigners and increased overseas debt) must be wrong.

At our meeting Olivier was interested in New Zealand’s experience where interest rate differentials drove liquidity into New Zealand via the banking channel, which was borrowed and consumed, and further drove up our exchange rate to the detriment of all exporters.

I have been banging on about this for many years, and think it is now abundantly clear that in New Zealand, and overseas, central banks – who had the independent power and responsibility to curb this – failed. It is time that they - and not politicians – get some stick about this. It was an abysmal failure and has left New Zealand with high debt. Yes, governments of Labour and National could have helped by introducing a CGT, but that does not absolve our Reserve Bank from responsibility.  They should have acted. They say they now can without any change in the law, so why didn’t they? 

Olivier, and the commentators in the book, point out that the countries worst affected by the GFC in general had not run fiscal surpluses in the good times. Michael Cullen and Helen Clark – take a bow. Those surpluses and the strong government balance sheet which resulted have shielded New Zealand from the fate suffered by many other western countries.

On the subject of Dutch disease, we explained how the effects of a high and volatile currency are concentrated for the non-dominant export sector. He of course understood this, but was interested in our views about how this makes it hard to broaden our export base. He was interested in Selwyn Pellet’s hydraulics analogy.

The greater the dominance of an export sector, the greater the hedge received by that sector, and the more concentrated the negative effect for the non-dominant sector. A small hedge spread across a wide base translates to a much larger negative effect concentrated upon the minority.

Olivier commented that it is not the short term volatility that is the greatest problem – short term volatility can be hedged via financial instruments.

Olivier said the overvaluation of exchange rates “can be very damaging and we can need interventions to deal with such outcomes.”

He agreed countries need to attend to the competitiveness of their exchange rates. He referred us to a recent IMF staff discussion paper:  “Two target, Two Instruments”, which again is worth reading.

He said the effects of a high exchange rate relative to fundamentals means that we “need a twist to monetary policy” as well. To make interventions for the benefit of exchange rates work it may be wise “to introduce friction in the wheels of capital flows, which make exchange rate interventions work better”. “Untrammelled flows of capital are bad”. Brazil, Switzerland, Turkey and Chile all provide examples of different responses (so of course does China, but in a much more controlled way).

I raised with Olivier the statements recently made by our outgoing Reserve Bank Governor that the focus on and remedies being used in the likes of Europe are distorting settings to the detriment of other countries. I said I shared that view. He noted this, and I suspect will look up Alan Bollard’s comments.

So, in terms of inflation targeting and leaving exchange rates alone, the IMF has moved on - probably more than the prevailing (not unanimous) views at the OECD.

It has become clearer and clearer to me as this trip has proceeded that the primacy of inflation targeting as we have known it really is dying and should be called dead, as Ambrose Evans Pritchard said to me in my first meeting this trip.

As was mentioned by more than one of the contributors to the IMF book, proponents of inflation targeting like Lars Svenson (the man chosen to critique and approve NZs approach some years back) seem to justify any change needed as being consistent with the original idea. Annual inflation targets morphed into ranges, the period from a year and a half, then to  two, and now to six or seven years. To the devotees, “if flexible inflation targeting has not worked as expected, either it was not applied properly or some information was missing. But the strategy was fine. In this way, you can continue with such concepts indefinitely, making mistake after mistake.”

We finished up with a discussion about the effects of income and asset inequality. He noted that while we are seeing income inequality between countries decrease, we are seeing income and asset (ie wealth) inequality rising within countries. On that count we know from our own statistics that New Zealand is performing badly.

These discussions do lead to value judgments about the political economy, and it was evident the head economist at the IMF was reluctant to become too involved in these. At one level I can see why this might be delicate territory for the head economist at the IMF.

However, the reality is that economic settings and international rules around banking, trade and investment do have societal effects including to wealth distribution. I find the reluctance of the economists from advisory bodies like the IMF to express opinions about these outcomes political in its own right, given that for many years they have promoted ideologies as well as policies which most definitely have these effects.

Anyway, the limited consideration of these effects (as opposed to discussions about economic efficiency) at the IMF and OECD is one of the reasons I am looking forward to my meeting with Joseph Stiglitz, because he faces no such constraint.

I was impressed with Olivier. He has self-confidence but was ready to listen. He has led the IMF forward. He is cautious, but encourages wide ranging debate.

Through incremental change he has moved things on substantially.


* David Parker is the Labour Party finance spokesman

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Once again, at least Parker is considering options, and making very considered arguments, backed by very credible experts. I do not wish to sound like a cheerleader only for Labour and the Greens, and would very much welcome the Nats to enter the debate, especially as they have the reins for at least nother two years. If they have somehow counter arguments based on logic or first principles, then by all means. Given that even Bollard on his way out has effectively admitted gross failure (albeit blaming the rest of the world), the Nats appear just stuck in the headlights, where they frankly don't need to be. Politically they actually would be in better shape taking some action. A new RB Governor; and the GFC gives them a perfect opportunity and excuse.

If they don't, you can only assume the Nats haven't got the intellectual firepower to be managing in a complex world.


Parker couln't be talking to a larger bunch of intellectual boffins, those who have never made one dollar in their lives, apart form their inflated salaries from some government funded institution. The IMF oversing the collapse of Greece, thats likely to evolve into out right civil war, Spain is on the same path. Stiglitiz, who is advising the Greek government, that should say it all, also believes the US can print its way to economic success.  see here,

None of these guys saw the GFC coming. They all, as does Parker believe a small group of people, with vested interests,  intervening in an economy will provide a better solution than a free martket with hundreds or thousands of participants trading. I know most will say look where the free market has got us, which is far from from reality, as had we had a free market we would never have had  sub prime lending for a start, thats a whole other story.

Parker shows, little grasp of real economics where a currency represents the wealth of a nation, and depreciating it makes us all poorer. If a country is not competitive its due to many things the least of which is currency, but its an easy target for a politician.

Lastly, seems Parker is on a tour of economists that are left leaning in their thinking, he'll come back to NZ blowing his trumpet how he's taken the view of the best economic minds, when has has really listerned to a bunch of discredited, intelectual boffins, schooled in Illusory economics, where monetary policy beats a maket out come, and they call the inflated asset values, real wealth. Right now monetary inflated wealth looks nothing like real to me!!

Bring him on, as for those who see through the illusion will be well reward in the end, its only a matter of time.


Robo 47,

Am happy to have a debate on the points made by these intellectual boffins, as you call them, if you can easily challenge their points, rather than just call them names. Your first link shows a debate between a very self interested (and obnoxious) hedge fund manager, and Stiglitz. Stiglitz makes what seems a straightforward point to me, that the Draghi plan of last week has acknolwedged, that if the interest rates paid by Greece, Spain, Italy etc are low enough, then in fact their debts are manageable That is simple maths. Greece may or may not be let go from the Euro, but that is another story. Even all the posters to the story back Stiglitz, depite the headline.

How was sub prime not free markets? The US banks invented packages of mortgages which were then onsold to other institutuions- primarily offshore banks; meaning the risk to the originating bank was nil, so they did not care whether they were ever repayable.

What I accept is not market based, is nearly all of the rest of the world's governments manipulating their currencies down to be competitive. Our exporters are getting blown away by the day by a massively overpriced exchange rate, which automatically feeds through into all domestic costs. And our government, Reserve Bank does nothing, excpet belatedly complain about the ROTW.

A currency sadly no longer, if it ever did, represent the wealth of a nation. The wealth or income of a nation is the collective income in a foreign major currency (say USD) of all the goods and services we can sell, plus any investment gains, less any investment losses/costs. Our net investment cost is $15 billion per annum, after years of neglect.

Parts of the world are still willing to buy us up; or loan us money, making us feel wealthier in the short term. Fool's paradise; and not something that can or will work for much longer.

The following quote in today's news puts a public face on the daily cost: These are all massively impacted by a too high exchange rate:

The Engineering, Printing and Manufacturing Union is warning of a deepening jobs crisis following Norske Skog’s announcement it will halve production at its Tasman paper mill in Kawerau.

The EPMU will now consult with the company over the redundancies, but is warning more than 100 jobs could go.

This follows the announcement of 120 redundancies at Solid Energy’s Huntly East mine, up to 400 jobs in the balance at Spring Creek, and last week’s announcement that 100 jobs will go at the Tiwai Point aluminium smelter by November.


Stephen L.

Think about the statement, "Greece can pay its debts if interest rates are kept low". The only reason interest rates are low in the US, the UK, Europe, is due to central banks printing money and buying government bonds. That is not sustainable. But it is the method central banks have used to create an inflationary environment for the last 2 or 3 decades. In the process there has been a massive build up of debt across both public and private sector. The debt growth was made possible by central banks manipulating interest rates to allow cheap money to be used for speculation and consumption. The economic activity of most western economies up to 2008 was not real, its was an inflated bubble on the back of debt. This economic activity cannot be revived with more debt. It is now a trap, if central banks stop printing, interest rates will rise, if they keep printing they debase the currency and get inflation.

I live in Europe, people know here that it is a trap and there is a day of reckoning coming. They recogise the mistakes that were made prior to 2008.

The reason sub prime was not of free market making is that, for one, if interest rates had not been kept articifically low, there would not have been a run up in house prices, secondly Fredi Mac and Fanny May in the US, are government entities, these two instutions, under Clinton, started buying mortgage debt and created the CDS market, to try and help lower paid get into housing, this had the effect of allowing the lender make loans to people they knew would never pay them back, because they could sell the loan on, what happend with the loan, was no consiquence. 

In the end the bailout of these banks was not a free market action either, had they be managed through bankruptcy, and the Glass Stegiel act resurected, there would likely be a much healthier economic situation today and the US would not have massivlely increased its debt.

The down sizing you quoted, is a consequence of over consumption across the globe, over consumption thats is only possible due to articifically low interest rates, that inflated asset prices and duping people into thinking it was real wealth, some of which was spent on consumption. Now asset prices are deflating, in many countries anyway, consumption is going to shrink, it has to.

Thats why Stiglitzes is wrong,  in that clip, the Greeks like so many countries, lived beyond their means, now the only way they can survive is if the interest on their debt is maipulated down. That is not a fix, that is papering over the problem by hiding a symptom.  Its the same as giving an alcoholic more booze, he feels better in  the short term, but does nothing to improve his long term out look. Government spending of borrowed money is such a large proportion of the economie in Greece and most developed nations, that when the government has to stop spending the econonmy shrinks hugely with a flow on effect to the private sector who supply the government, as the economy shrinks, the abilty to service the debt get worse and so on. Hendry was right the only solution is default. It will happen, as you say its in the math. Why do you think borrowing costs have gone up for Greece, there are less people willing to lend, same would be obvious in the UK and the US, but there the central banks are buying bonds. In both those countries the central bank are now the largest buyers of bonds, if they stop, interest rates will go up. Ka BOOM the whole show will be over. Thats why it's called Illusory economics. 


funny....they didnt repay them when they are low and now anybody with sense has run a mile.

like duh.




Most of your points, I agree with; I'm sure in NZ as everywhere there is a good awareness of the asset bubbles that built up pre 2008; and that they were partly caused by too loose monetary conditions, although not money printing at the time. Evans Pritchard actually moots that the underlying cause was countries with an inbuilt addiction to current account surpluses with nowhere to park their money-  incl Germany, China, Switzerland, Japan- so they threw it at anything, as well as loaning the ROTW the money to buy their cheap stuff. I rather agree with him, but that is another story.

We are though now where we are; and what should the world do about it?  Related, given the ROTW is printing/devaluing furiously- whether a good idea or not- what should NZ do in response? There is lots of debt in the world, and still very high structural imbalances; of which in NZ's case, very clearly the current account deficit is the major problem such that the fiscal deficit is a sideshow.

Is deep austerity the answer- even you seem to say no. You seem to champion mass defaults- certainly in Greece's case (and there I agree, in that in their own interest they should leave the Euro ASAP.) Mass defaults lead to mass banking failure, falling like dominos. (there seems a strange widespread belief that such failure affects only shareholders. Depositors go very quickly unless there is government intervention. Once they go, its all over). Consumption would collapse more than is remotely desirable.

Or there is managed inflating away some of the debt, with forced low interest rates for a considerable period. The ROTW is pretty much all following that path, again, rightly or wrongly. NZ and Australia are not. Our respective manufacturing industries are being decimated by the day. Tourism is dying. 

Parker is absolutely correct to challenge whether in our current circumstances, and given the ROTW is doing what they are doing, religiously following a low inflation target as our only monetary policy, is indeed the least bad idea. I believe it's currently a very poor policy indeed for NZ, and should be challenged.



I hope David Parker can spend some time with Steve Keen when he gets back south-side:


This is a link to SK's lecture at Canty Uni last Saturday. (Well done for oranising this Raf.)


I like that he refers to neo-classic economists as a 'Priesthood', that is, there is more faith than factual involved in their practice.






PS - inflation targetting is out of context with the complexity we now face.


Here is BH and SK doing a coffee thingy interview, about 16mins long: