Is New Zealand Once Again Leading The Way?

Includes: ENZL
by: Scott Sumner

In 1990 the Kiwis were the first to adopt inflation targeting, and now there is a report that they may be the first to give the central bank control over both monetary policy and an important tool of fiscal policy:

New Zealand's main opposition Labour Party plans to change legislation governing the country's central bank in its first term if it wins next month's election, finance spokesman David Parker said.

The plans, which include giving the Reserve Bank of New Zealand an alternative tool for managing inflation, have been discussed with Governor Graeme Wheeler, though "not in detail," Parker told reporters in Auckland today after Labour began its election campaign. The vote takes place Sept. 20.

Labour wants to give the central bank the ability to recommend changes to the rate of contribution to the national pension savings program, Kiwisaver. The RBNZ could use the new tool as an alternative to the official cash rate to "take the heat out of the economy," Parker said in April, when the policy was announced.

Quick reactions:

1. It would be better to rely 100% of monetary policy, particular as NZ doesn't face the zero bound problem.

2. But if others insist we need a combined monetary/fiscal approach, then this is far, far better than other forms of fiscal policy. I would think it would appeal to people like Brad DeLong, who focus a lot on the savings/investment imbalance perspective.