Latest / Early Edition with Ryan Bridge / Eric Crampton: NZ Initiative Chief Economist on the report looking at the Reserve Bank's handling of Covid inflation

Transcript

Eric Crampton: NZ Initiative Chief Economist on the report looking at the Reserve Bank's handling of Covid inflation · Early Edition with Ryan Bridge

• 0:00
  Speaker 1: The Reserve Banks taking a hard look at itself. Findings
• 0:02
  Speaker 1: aren't exactly shocking, are they. Its own reports says it
• 0:05
  Speaker 1: didn't hike interest rates fast enough to tackle COVID inflation.
• 0:08
  Speaker 1: Interest rates fell to just zero point two five percent
• 0:10
  Speaker 1: in twenty twenty one, they rocketed up to five point
• 0:14
  Speaker 1: five and twenty twenty three, this is as inflation hit
• 0:17
  Speaker 1: seven point three percent. Doctor Eric Crampton, chief economist at
• 0:20
  Speaker 1: the New Zealand Initiative, Eric, good morning, Good morning. Have
• 0:24
  Speaker 1: they hit the nail on the head?
• 0:26
  Speaker 2: Well, they've identified some of the problems. They noted some
• 0:30
  Speaker 2: of them were a little bit surprising, but I guess
• 0:32
  Speaker 2: we should have realized what was going on. They noted
• 0:34
  Speaker 2: that some of the monetary policy models that couldn't deal
• 0:37
  Speaker 2: well with supply shocks, and we had dealt with the
• 0:41
  Speaker 2: supply shock in COVID. They're ended sim model, which is
• 0:44
  Speaker 2: the core backbone that they used for forecasting what's going
• 0:47
  Speaker 2: on in the world. It wasn't able to handle the
• 0:50
  Speaker 2: kind of supply shock that has a lot large cross
• 0:53
  Speaker 2: country interactions. So they're trying to beef that up. They're
• 0:57
  Speaker 2: trying to beef up a lot more real time data
• 0:59
  Speaker 2: to a better handle on what's going on. I guess
• 1:02
  Speaker 2: one of the disappointing bits is that they're saying in
• 1:05
  Speaker 2: hindsight on some of this. It wasn't just hindsight. There
• 1:08
  Speaker 2: are plenty of people saying at the time that the
• 1:11
  Speaker 2: reserve Bank was printing too much money, that it would
• 1:14
  Speaker 2: have strong inflationary consequence, and that it was fundamentally the
• 1:18
  Speaker 2: wrong response to a large negative supply shock. So what
• 1:22
  Speaker 2: I mean by that reserve banks are used to dealing
• 1:26
  Speaker 2: with things like the GFC from the two thousands or
• 1:30
  Speaker 2: other financial crises, where the shock is coming out of
• 1:33
  Speaker 2: the financial side of the economy. It's not coming out
• 1:36
  Speaker 2: of the real side of the economy, and they'll often
• 1:39
  Speaker 2: deal with that by printing money, reducing interest rates to
• 1:44
  Speaker 2: boost aggregate demand, to get people spending a bit more again,
• 1:47
  Speaker 2: and things then sort of ride themselves out. That doesn't
• 1:51
  Speaker 2: really work when the underlying productive capacity of the economy,
• 1:56
  Speaker 2: both here and elsewhere, has substantially shifted inward. Just every
• 2:01
  Speaker 2: combination that you'd have just won't be as productive as
• 2:03
  Speaker 2: it used to be because COVID is keeping everybody at home.
• 2:07
  Speaker 2: Factories couldn't run, cold stores weren't running well, nothing was
• 2:11
  Speaker 2: really working well, and if you pump money into that environment,
• 2:15
  Speaker 2: you just have more money chasing the same number of goods,
• 2:18
  Speaker 2: and that ramps prices up. They should have realized this
• 2:22
  Speaker 2: a lot faster. We'd been putting up notes on this
• 2:25
  Speaker 2: from our shop around June twenty twenty. I think I
• 2:27
  Speaker 2: had a blog post on it in April. Bryce Will
• 2:30
  Speaker 2: consented seeing it, but also folks like Grant Spencer and
• 2:33
  Speaker 2: Arthur Grimes had been talking about the asset price run
• 2:36
  Speaker 2: up that you're going to see from the monetary policy.
• 2:39
  Speaker 2: We had so great that now four or five years later,
• 2:44
  Speaker 2: they're fixing some of this, But it's it would have
• 2:49
  Speaker 2: been better if they had identified it earlier.
• 2:52
  Speaker 1: It would avoid absolutely Eric So in a nutshell, you
• 2:55
  Speaker 1: know that I've admitted that they were too slow. If
• 2:57
  Speaker 1: that'd been quicker, would that have been as state? Did
• 3:01
  Speaker 1: the speed effect the destination and therefore would we not
• 3:06
  Speaker 1: be in as much shite as we are now.
• 3:10
  Speaker 2: I don't have the big macro forecasting models behind me
• 3:13
  Speaker 2: like they do. I would expect that had they realized
• 3:18
  Speaker 2: by mid to late twenty twenty that they were really
• 3:21
  Speaker 2: dealing with a large supply shock rather than a shock
• 3:24
  Speaker 2: from the demand side of the economy. They would have
• 3:26
  Speaker 2: engaged in less of the initial money pump printing, fewer
• 3:32
  Speaker 2: large scale acid purposes purchases, and less of a reduction
• 3:36
  Speaker 2: and interest rates, and they would have started to increase
• 3:40
  Speaker 2: those again more quickly. That should have avoided hitting the
• 3:44
  Speaker 2: peaks that we did hit because we wouldn't have hit
• 3:46
  Speaker 2: the same inflation outcomes that we hit. But the Reserve
• 3:49
  Speaker 2: Bank has had to be fighting these past couple of years.
• 3:53
  Speaker 2: Isn't just the inflation that got away from it, but
• 3:56
  Speaker 2: also the really high expectations about inflation that started getting
• 4:00
  Speaker 2: baked in. So if you look back a couple of
• 4:03
  Speaker 2: years ago, inflation expectations were running well north of the
• 4:09
  Speaker 2: target range that the Reserve Bank tries to hit. That's
• 4:12
  Speaker 2: what we call unanchored. So if everyone expects that the
• 4:15
  Speaker 2: Reserve Bank is going to do a good job and
• 4:18
  Speaker 2: keep inflation around two percent, it has a lot easier
• 4:21
  Speaker 2: time of doing that. When people start expecting more inflation,
• 4:24
  Speaker 2: they have a hell of a time getting it back down,
• 4:27
  Speaker 2: and we're experiencing some of the consequences.
• 4:28
  Speaker 1: Yeah. Plus, and I also had the government spending, didn't
• 4:31
  Speaker 1: I don't be Eric Crampton the New Zealand Initiative.
• 4:34
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• 4:37
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• 4:40
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