Former NZ Reserve Bank Governor says central banks have mishandled inflation
The NZ Initiative released:
A research note released today by The New Zealand Initiative mainly attributes the outbreak of inflation in many economies to central bank mistakes.
Co-authored by Graeme Wheeler, former Governor of the Reserve Bank of New Zealand, and Bryce Wilkinson, Senior Research Fellow at The New Zealand Initiative, the paper argues that central banks overall:
- were too confident about their monetary policy framework;
- were too confident about their models;
- were too confident they could control output and employment;
- lost their focus on price stability and took on too many mandates;
- faced conflicts in some cases with conflicting ‘dual mandate’ objectives; and
- were distracted by extraneous political objectives, such as climate change.
The foreword by Dr William White, former deputy Governor of the Bank of Canada and a former Economic Adviser and Division Head at the Bank for International Settlements, concurs: “Central bankers have fundamentally misread the nature of the system they are trying to control”, Dr White observes.
“The economic and financial consequences of central bank mistakes will be serious and felt world-wide,” said Dr Bryce Wilkinson. “The poorest and most vulnerable will be hit hardest by monetary policy errors.”
Graeme Wheeler concludes. “To begin restoring their damaged credibility, central banks must assess and acknowledge why their models and judgements were so inaccurate and inform the public on what steps they are taking to rebuild public confidence”.
It is very rare for a former Governor to be critical of the performance of their successor. To be fair this report isn’t about the NZ reserve Bank so much as central banks generally.
A couple of extracts:
The main cause of inflationary pressures lies in the errors of judgment made by central banks in conducting monetary policy during the Covid pandemic. While Russia’s invasion of Ukraine accentuated the rise in inflationary pressures, commodity prices were already high because of the rapid global expansion in liquidity and debt.
So Ukraine contributed but was not the primary cause.
In the US, the size of the Federal Reserve’s asset portfolio increased from USD $4 trillion in early 2020 to almost USD $9 trillion in early 2022-equivalent to around 23% of pre-Covid GDP. (In three rounds of quantitative easing in the six years following the global financial crisis the Federal Reserve’s asset portfolio increased by USD $3 trillion). New Zealand also had a large program of quantitative easing with $53.5 billion of asset purchases – equivalent to 17 % of pre-covid GDP.
And we are now paying the price for it.
Confident in their ability to maintain low inflation, central banks in recent years began diverting resources to other topics such as climate change and inequality (and in the case of the RBNZ also embracing New Zealand’s indigenous history and culture and adopting a Māori world view in the operations of the central bank). Such issues bear little if any relationship to the reasons why central banks exist — ensuring
price stability and financial stability.
It is a very good and easy to read paper. Sadly the Reserve Bank of New Zealand maintains their stance that they made no errors at all.