Brash defends Reserve Bank Act

Don Brash writes an op-ed in response to Finlay MacDonald's call for politicians, not the Reserve Bank, to be in charge of determining interest rates. Brash responds:

He then goes on to argue that “plenty of people” see this act “as a relic of failed economic dogma, well past its due date for reform”, although he mentions only two people by name – Jim Anderton and that well-known economist Winston Peters.

Need more be said.

He links the Reserve Bank Act and similar legislation elsewhere to the current financial crisis.

Whatever the cause of the current crisis, nobody that I know of seriously suggests it was caused by our Reserve Bank, or other central banks, focusing policy on keeping under control by keeping interest rates too high. Indeed, there are many observers who believe that the trigger for the current crisis was interest rates in the US being kept too low for too long, with the result that banks were encouraged to lend to a large number of borrowers of very marginal creditworthiness.

Excellent point.

First, the central banks of virtually all developed countries – certainly the States, the United Kingdom, Canada, Australia, and the countries of the European Monetary Union – have removed monetary policy from the day-to-day influence of politicians. Why? Because experience over decades has shown that politicians have a tendency to manipulate monetary policy for their own political advantage, to the economic cost of their countries.

I can't comprehend why anyone would want Rob Muldoon setting interest rates again.

Fourth, nothing about 's experience since we reached price stability in 1991 suggests that focusing monetary policy on keeping average prices stable damages growth or employment. We've had some of the best growth in our history over the past 16 years, and, until recently, we had the lowest level of in the developed world.

Exactly. Emperical evidence is overwhelming that you can have low unemployment with monetarist policies. Likewise overwhelming evidence that you can eliminate protectionist barriers and have low unemployment.

Fifth, while dropping interest rates can stimulate economic activity in the short-term, all countries have learnt from bitter experience that, in the longer-term, using interest rates to try to get faster economic growth results only in damage to economic growth, as inflation makes it harder to interpret the price signals coming from the market. Sustainable economic growth ultimately depends on increasing output per person employed in other words, on and tolerating higher inflation does nothing to achieve that goal. If it did, Zimbabwe (with high inflation) would be enjoying fantastic economic growth and high living standards, and the United States (with low inflation) would have poor growth and low living standards.

Whatever the problem is, high inflation is never the answer.

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