Cullen abandons monetary policy consensus

This is a big story.  A very very big story.  Since the 1980s the bipartisan position of the NZ Government has been that monetary policy (or keeping inflation low) does not impact on the long-term sustainable rate of growth of the economy.

In fact the premise accepted by almost every OECD country is that you simply can not get higher long-term growth by simply having more inflation.   It isn’t that easy, and there is plenty of empirical evidence against the pre-1970s view that you could.

Dr Cullen has said he no longer believes in this:

“The accepted consensus has been that … monetary policy helps keep the economy stable by moderating economic cycles, without impacting on the sustainable rate of growth of the economy.

“My overriding concern is that this view no longer holds,”

He later told The Dominion Post he and the Reserve Bank were at odds.

“Oh yes, I have doubts about that consensus. I think it is probably the view the Reserve Bank would still hold but it’s not a view that I would share.”

Again this is very big.

The Minister of Finance no longer supports the official monetary policy of the Government.   He does it seems believe one gets higher long term growth by having higher inflation.

How does poor Dr Bollard do his job, when his Minister is saying he disagrees with what the bank is trying to do.

As Dr Cullen no longer accepts the consensus view on monetary policy, maybe a journalist could get him to explain what his view now is.  Could he specify how high a rate of inflation he would support to boost long-term economic growth.  What level of inflation do we need to grow faster than Australia?

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