Bank regula+on, exchange rate policy, overseas debt, and asset sales: how to untangle them? Geoff Bertram 31 March 2011
Preliminary
•
In the real world, market imperfec+ons are pervasive. The history of economics is largely about analysing the nature of those imperfec+ons and what can be done about them
•
The ‘market efficiency’ paradigm works from the presump+on that for prac+cal purposes real-‐world markets cannot be improved upon
•
The ‘mixed-‐economy’ paradigm starts from the presump+on that markets won’t do everything, and even can be improved, and that some things should not be leM to the market mechanism to solve but require collec+ve choice, exercised through poli+cs
•
Market failures quickly become bound up with issues of power: perfect markets would be democra+c in the sense of dispersing power (not of solving distribu+onal ques+ons), but imperfect markets are all about the exercise of power by some at the expense of others
•
Even perfect markets leave open the ques+on of the ideal distribu+on of wealth and income. A fundamental theore+cal conclusion of twen+eth-‐century neoclassical economic theory was that disagreements over distribu+on could not be resolved by a-‐priori reasoning
Thinking about New Zealand macroeconomics • Firstly, if indeed there are fundamental imbalances in the economy as a whole, it is important to understand how those imbalances have emerged from the interplay of market forces with policy and social structure, and to think about how policy can key variables with a long-‐run perspec+ve • Secondly, in thinking about changes that might be made to policy seWngs, it is important to explicitly sort out – what mechanisms you think are at work – how par+cular policy changes would be supposed to deliver desired results – whether there is evidence for the causal mechanisms being appealed to
• Thirdly, humility is a virtue in an economist. Three cau+onary notes:
– It’s seduc+vely easy to overstate the scale and imminence of macroeconomic threats and then engage in “shock doctrine” arguments for instant radical changes. That’s where Think Big, Rogernomics, and the current renewed war on the welfare state came from. The essence of the approach is to underplay the resilience and sustainability of the market economy – Policies do have long-‐run effects on the shape of the economy and the distribu+on of wealth and income. Once set, those effects are not easy to reverse –ins+tu+onal incen+ves and constraints in a market system are like the forms for concrete (the liquid se]les to equilibrium in the liquid short run, then sets hard in the long run) – so there are real long-‐run costs and benefits from today’s policies – I have been one of those worried abut sustainability issues in New Zealand in the era of infla+on targe+ng and floa+ng exchange rate, and I have been pleasantly surprised by the absence of a macroeconomic ‘sudden stop’ since 1990. New Zealand did have two sudden stops in the preceding decades – one in the mid 1970s and one triggered by Rogernomics in the 1980s – but the deregulated economy has performed be]er than I expected. Migra+on has helped a lot, and the bank-‐facilitated inflow of capital funds has staved off the transfer problem that I thought possible early last decade.
Those sudden stops did hurt both absolutely and rela+vely
Muldoon and oil shocks
Roger-‐ nomics
What are the ‘imbalances’ and why have they developed? •
The current account deficit on the balance of payments, which is bound up with (i) the evolu+on of rela+ve prices and the alloca+on of resources between tradables and non-‐ tradables; and (ii) the degree of capital inflow into the economy
•
The ability of deregulated ‘sheltered sectors’ to exercise market power while ‘exposed sectors’ are unable to do so, which drives part of the rela+ve-‐price story (capital inflow drives another part)
•
The external debt, which flows from the current account deficit but itself plays a role in driving the deficit, via the exchange rate and domes+c rela+ve prices
•
The emergence and persistence of a financial sector rife with perverse incen+ves (i) for New Zealand households and firms to consume and borrow without facing the external costs of their decisions; and (ii) for the banks to drive credit expansion on a basis that looks dodgy (poten+ally ‘unsustainable’) in the longer run
•
The persistent drive by wealthy private interests to appropriate gains, socialise losses, and lessen the taxes they face – and the con+nual weakness of government policy and regula+on in the face of the lobbying pressures these groups command
•
The worsening distribu+on of income and wealth, both wages/profits, and poor/rich (closely linked to the poli+cal success of neoliberal thinking:
A couple of toy models from old textbooks
• Useful for organising one’s thinking about a small open economy, used to be taught as central parts of the macro-‐ economics syllabus, and capture important elements in how New Zealand economists of the 1960s and 1970s used to think about macro • First, the macroeconomic iden+ty that the market economy delivers ex post in each period • Second a loanable-‐funds model to see how the iden+ty shows up in the balance of payments current account • Third some implica+ons/consequences of recognising that output is comprised of two imperfectly-‐subs+tutable types of produc+on: tradable and non-‐tradable
The macro iden+ty Disposable na+onal income
Y-‐ π ≡ C + I + G + X – M Domes+c Output absorp+on of goods Overseas and investment services income
Trade balance (goods and services)
Rewrites as: (S – I) + (T – G) ≡ (X -‐ M -‐ cyπ) Private savings
Government savings
≈ Current account surplus
The loanable-‐funds model at given Y Interest rate
S+T ShiMs with income
Equilibrium interest rate with no capital flows
in
‘World interest rate’ (here local popula+on is rela+vely ‘impa+ent’)
iw
I+G
Current account deficit
Units of output
Sudden stops do happen in the real world • Intertemporal op+misa+on models don’t all imply op+mal outcomes! • Treasury and Bill English have both recently talked about economic imbalances
Non-‐tradables
Tradables
Cullen saw the problem clearly back Cullen then presided over this in 2000
English sees the problem in 2010
From Budget 2010
Why that falling-‐behind of tradables? • Possibly a change in the economy’s resource endowment • More likely a result of economic incen+ves, i.e. rela+ve prices • High nominal and real exchange rate squeezes the profitability of tradables unless their produc+on costs fall rapidly • Prices moving in favour of non-‐tradables induce resource realloca+on • [But note that a lot of non-‐tradables actually bring foreign exchange income – services in tourism, educa+on, film produc+on, soMware => there’s a need for more careful decomposi+on of output data]
Toy model with tradables and non-‐tradables: Salter-‐Swan (1950s) Non-‐ tradables
Social indifference curves Full equilibrium: internal and external balance
A Produc+on possibili+es fron+er Budget line for full employment, given rela+ve price ra+o Tradables
What if the price of non-‐tradables rises rela+ve to the price of tradables, while internal balance is maintained? Non-‐ tradables
New output combina+on New consump+on point New budget line
B
C
A
Original budget line Trade deficit
Tradables
Conclusion: internal balance is retained but external balance is not This leaves the economy with external debt accumula+ng over +me Whether that is sustainable, and to what level of debt, depends on the aWtudes of overseas investors
Another Salter-‐Swan story: what if overseas capital flows in to buy up local assets? Non-‐ tradables New consump+on point
D
New budget line at original rela+ve price ra+o
A Infla+onary excess demand for non-‐ tradables Original budget line
Trade deficit
Tradables
What happens next? Answer: infla+on driven by non-‐tradables prices un+l their rela+ve price rises enough to bring demand and supply into balance at E Non-‐ tradables
Internal balance restored at E
New consump+on point F
D E
F
New budget line at new rela+ve price ra+o
A
Trade deficit
Tradables
Conclusion: internal balance is retained but external balance is not This leaves the economy with external debt accumula+ng over +me Whether that is sustainable, and to what level of debt, depends on the aWtudes of overseas investors That’s the same as the earlier case of an exogenous shock to non-‐tradable prices …. Which story dominates? First is the ‘hoover effect’; second is the ‘overseas takeover’ effect In the first case, policy would worry about driving down the domes+c price ra+o (e.g. by regula+ng non-‐tradables prices) to shiM resources into tradables, and thus slow down offshore borrowing In the second case, policy would look at controlling the capital inflow with an eye on keeping tradables healthy in case of a sudden stop/transfer problem If you don’t know which causal mechanism prevails, be ready for both sorts of policy interven+on So what do the data show?
Take first the infla+on-‐adjusted nominal exchange rate (RBNZ)
h]p://www.rbnz.govt.nz/keygraphs/Fig8b.html
Trade balance and RBNZ compe66veness 1988-‐2010 4,000
1.3000
3,000
1.2000
2,000 1.1000 1,000 1.0000 0
Trade balance (LH scale) 0.9000
Compe++veness (RHscale)
-‐1,000 0.8000 -‐2,000
0.7000
-‐3,000
-‐4,000 1985
0.6000 1990
1995
2000
2005
2010
2015
March years
Trade data from Infoshare; inverted real TWI from RBNZ
But then there’s the Salter-‐Swan real exchange rate: the price ra+o between non-‐tradables and tradables
In terms of economic structure NZ faces a steady rela+ve-‐price swing against tradables • I have a]ributed this to the failure to regulate monopoly u+li+es which have therefore been able to push up margins and pass on cost increases, while tradables producers have been squeezed • It may also reflect, though, changing rela+ve supply cost… • The mechanism is a higher infla+on rate for non-‐ tradables, which year by year moves prices in their favour Geoff Bertram
21
RBNZ, Monetary Policy Statement September 2010 p.2 Geoff Bertram
22
1900 1902 1904 1906 1908 1910 1912 1914 1916 1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Salter-‐Swan Real exchange rate: two es6mates, 2000=1
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Ra+o GDP deflator to import and export prices Ra+o non-‐tradeables/tradeabbles prices
Sheltered sectors pulling income from exposed?
1970Q1 1971Q2 1972Q3 1973Q4 1975Q1 1976Q2 1977Q3 1978Q4 1980Q1 1981Q2 1982Q3 1983Q4 1985Q1 1986Q2 1987Q3 1988Q4 1990Q1 1991Q2 1992Q3 1993Q4 1995Q1 1996Q2 1997Q3 1998Q4 2000Q1 2001Q2 2002Q3 2003Q4 2005Q1 2006Q2 2007Q3 2008Q4 2010Q1
Index, 1970-‐2010=100
New Zealand Real Exchange Rate: Two Versions
200.0
180.0
160.0
140.0
120.0 Nominal TWI
100.0 NZ/Rela+ve world CPIs
80.0 Real TWI (=Col C / Col E *100)
60.0 Rela+ve price of non-‐tradeables/tradeables, March 1988=100
40.0
20.0
0.0
March years 2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
% of GDP
New Zealand Current Account Balance and Merchandise Trade Balance, annual data 1951-‐2010 Current account balance LHS
10 Trade balance LHS
5
0
-‐5
-‐10
-‐15
-‐20
New Zealand Current Account Balance and Merchandise Trade Balance, annual data 1951-‐2010
Current account balance LHS
10
3.600
Trade balance LHS
Salter compe++veness RHS 5
% of GDP
0
2.600
-‐5
-‐10
1.600
-‐15
March years
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
0.600 1950
-‐20
New Zealand Current Account Balance and Merchandise Trade Balance, annual data 1951-‐2010 Current account balance LHS Trade balance LHS
10
3.600
Salter compe++veness RHS RBNZ comoe++veness RHS 5
% of GDP
0
2.600
-‐5
-‐10
1.600
-‐15
March years
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
0.600 1950
-‐20
New Zealand Current Account Balance and Merchandise Trade Balance, annual data 1951-‐2010 Current account balance LHS Bretton Woods
10
Supply shocks + inflation
Float
Trade balance LHS
3.600
Salter compe++veness RHS RBNZ compe++veness RHS
5
% of GDP
0
2.600
-‐5
-‐10
1.600
-‐15
March years
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
0.600 1950
-‐20
As external debt rises, the current account gets driven by investment income π Current account and investment income balance 0 -2000 -4000
-8000 -10000 -12000 -14000 -16000
March years Current account balance
Investment income debit
2010
2005
2000
1995
1990
-18000 1985
$ million
-6000
h]p://www.rbnz.govt.nz/keygraphs/Fig6.html
Figure 4.1 The funding of the current account deficit: it’s the banks
Net International Investment Position (Government plus Private) 160 140 120
80 60 40 20 0
Total Private and Government Net Overseas Liabilities Banks' net external liabilities Government Foreign-Currency Liabilities Government NZD liabilities held offshore
2010
2000
1990
1980
1970
1960
1950
1940
1930
1920
1910
-20 1900
% of GDP
100
Net International Investment Position (Government plus Private) 160 140 120
80 60 40 20 0
Total Private and Government Net Overseas Liabilities Banks' net external liabilities Government Foreign-Currency Liabilities Government NZD liabilities held offshore
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
-20 1988
% of GDP
100
Who owes what exactly to whom? • It’s not helpful to just say “we” or “the country” are in debt or overextended. • The fact is that NZ residents basically owe the banks sums in NZD, with no exchange rate exposures • The banks are siWng on $318 billion of NZD assets funded by $96 billion of foreign currencies and $230 billion of NZD liabili+es • The long-‐run worry for the banks is of capital losses in the event of deprecia+on: the NZD claims are collec+ble in NZD; the foreign-‐currency liabili+es will revalue upwards if the NZD exchange rate falls • This is not the hedging issue as usually understood – it’s a longer-‐run balance sheet mismatch
Consolidated Balance Sheets of the Banks January 2011
-‐80,000 Dec-‐10
Jun-‐10
Dec-‐09
Jun-‐09
Dec-‐08
Jun-‐08
Dec-‐07
Jun-‐07
Dec-‐06
Jun-‐06
Dec-‐05
Jun-‐05
Dec-‐04
Jun-‐04
Dec-‐03
Jun-‐03
Dec-‐02
Jun-‐02
Dec-‐01
Jun-‐01
Dec-‐00
Jun-‐00
Equity Interna6onal Investment Posi6on
80,000
60,000
40,000
20,000
0 Equity assets
Equity Liabili+es
-‐20,000 Net Interna+onal Equity
-‐40,000
-‐60,000
-‐200,000 Nov-‐10
Jun-‐10
Jan-‐10
Aug-‐09
Mar-‐09
Oct-‐08
May-‐08
Dec-‐07
Jul-‐07
Feb-‐07
Sep-‐06
Apr-‐06
Nov-‐05
Jun-‐05
Jan-‐05
Aug-‐04
Mar-‐04
Oct-‐03
May-‐03
Dec-‐02
Jul-‐02
Feb-‐02
Sep-‐01
Apr-‐01
Nov-‐00
Jun-‐00
Banks Interna6onal Investment Psi6on
100,000
50,000
0
-‐50,000 Bank loan assets
Banks liabili+es Banks net posi+on
-‐100,000
-‐150,000
-‐40,000 Dec-‐10
Jun-‐10
Dec-‐09
Jun-‐09
Dec-‐08
Jun-‐08
Dec-‐07
Jun-‐07
Dec-‐06
Jun-‐06
Dec-‐05
Jun-‐05
Dec-‐04
Jun-‐04
Dec-‐03
Jun-‐03
Dec-‐02
Jun-‐02
Dec-‐01
Jun-‐01
Dec-‐00
Jun-‐00
Government Interna6onal Loan Posi6on
20,000
10,000
0
-‐10,000 General government assets
General government liabli+es
Government net
-‐20,000
-‐30,000
-‐100,000 Jun-‐00 Nov-‐00 Apr-‐01 Sep-‐01 Feb-‐02 Jul-‐02 Dec-‐02 May-‐03 Oct-‐03 Mar-‐04 Aug-‐04 Jan-‐05 Jun-‐05 Nov-‐05 Apr-‐06 Sep-‐06 Feb-‐07 Jul-‐07 Dec-‐07 May-‐08 Oct-‐08 Mar-‐09 Aug-‐09 Jan-‐10 Jun-‐10 Nov-‐10
Other sectors Interna6onal Loan Posi6on
40,000
20,000
0
-‐20,000 Other sectors assets
-‐40,000 Other sectors liabli+es
Other net
-‐60,000
-‐80,000
But there has been a break in the trend since the 2008 crisis
(The interes+ng ques+on domes+cally is whether the economy has saturated its demand for credit – i.e. whether deleveraging will con+nue for the next few years regardless of inducements to borrow)
-‐5
-‐10
-‐15 Oct 2010
Jun 2010
Feb 2010
Oct 2009
Jun 2009
Feb 2009
Oct 2008
Jun 2008
Feb 2008
Oct 2007
Jun 2007
Feb 2007
Oct 2006
Jun 2006
Feb 2006
Oct 2005
Jun 2005
Feb 2005
Oct 2004
Jun 2004
Feb 2004
Oct 2003
Jun 2003
Feb 2003
Oct 2002
Jun 2002
Feb 2002
Oct 2001
Jun 2001
Feb 2001
Oct 2000
Jun 2000
% change in credit outstanding by sector, June 2000 to January 2011
30
25
20
15 Agriculture
10 Business
Housing
Consumer
5 TotalHousehold
Total Credit
0
0.0 Jan 2011
Sep 2010
May 2010
Jan 2010
Sep 2009
May 2009
Jan 2009
Sep 2008
May 2008
Jan 2008
Sep 2007
May 2007
Jan 2007
Sep 2006
May 2006
Jan 2006
Sep 2005
May 2005
Jan 2005
Sep 2004
May 2004
Jan 2004
Sep 2003
May 2003
Jan 2003
Sep 2002
May 2002
Jan 2002
Sep 2001
May 2001
Jan 2001
Sep 2000
May 2000
Jan 2000
$billion
Credit outstanding by sector
350.0
300.0
250.0
200.0
Consumer
150.0
Housing
Business
Agriculture
100.0
50.0
Funding the growth of NZ dollar assets of the banks and M3 ins6tu6ons March 1988 -‐ Jan 2011 350,000
300,000
250,000 Total NZD assets, M3 ins+tu+ons Total NZ dollar funding, M3 ins+tu+ons Total NZ dollar funding, registered banks NZ resident NZD funding, M3 ins+tu+ons
150,000
NZ resident NZD funding, registered banks Total foreign currency funding, M3 ins+tu+ons Total foreign currency funding, registered banks
100,000
Funding from associates, M3 ins+tu+ons Funding from associates, registered banks
50,000
0 Mar 1988 Jan 1989 Nov 1989 Sep 1990 Jul 1991 May 1992 Mar 1993 Jan 1994 Nov 1994 Sep 1995 Jul 1996 May 1997 Mar 1998 Jan 1999 Nov 1999 Sep 2000 Jul 2001 May 2002 Mar 2003 Jan 2004 Nov 2004 Sep 2005 Jul 2006 May 2007 Mar 2008 Jan 2009 Nov 2009 Sep 2010
$ million
Total NZD assets, registered banks 200,000
Back in 2009 I was worrying about the rapidly growing gap
Three years on, it’s virtually frozen
Mean+me the Core Funding Requirement has begun to shiM the maturity structure of bank funding
Banks' foreign-‐currency funding by maturity 120000
B8.9 5 + 100000
B8.8 4 years < 5 years B8.7 3 years < 4 years
80000
B8.5 1 year < 2 years
60000
B8.4 90 days < 1 year B8.3 2 < 90 days
40000
B8.2 Other call 20000
B8.1 Transac+on call Wholesale guarantee start and end Dec 2010
Sep 2010
Jun 2010
Mar 2010
Dec 2009
Sep 2009
Jun 2009
Mar 2009
Dec 2008
Sep 2008
Jun 2008
Mar 2008
Dec 2007
Sep 2007
Jun 2007
Mar 2007
Dec 2006
Sep 2006
Jun 2006
Mar 2006
Dec 2005
Sep 2005
Jun 2005
Mar 2005
0 Dec 2004
$ million
B8.6 2 years < 3 years
Foreign-‐currency funding under Wholesale Guarantee
Banks' foreign-‐currency funding by maturity: % breakdown 100%
90%
80%
70%
B8.9 5 + B8.8 4 years < 5 years
60%
B8.7 3 years < 4 years 50%
B8.6 2 years < 3 years B8.5 1 year < 2 years
40%
B8.4 90 days < 1 year B8.3 2 < 90 days
30%
B8.2 Other call B8.1 Transac+on call
20%
10%
Dec 2010
Sep 2010
Jun 2010
Mar 2010
Dec 2009
Sep 2009
Jun 2009
Mar 2009
Dec 2008
Sep 2008
Jun 2008
Mar 2008
Dec 2007
Sep 2007
Jun 2007
Mar 2007
Dec 2006
Sep 2006
Jun 2006
Mar 2006
Dec 2005
Sep 2005
Jun 2005
Mar 2005
Dec 2004
0%
One black mark in the picture is the Wholesale Deposit Guarantee, which has made $10 billion of bank borrowing a taxpayer liability, with $8.5 billion owed in foreign currency, mainly USD That’s 6% of the banks’ gross foreign currency liabili+es for which the exchange risk has been passed to society
0 Jan-‐09 Mar-‐09 May-‐09 Jul-‐09 Sep-‐09 Nov-‐09 Jan-‐10 Mar-‐10 May-‐10 Jul-‐10 Sep-‐10 Nov-‐10 Jan-‐11 Mar-‐11 May-‐11 Jul-‐11 Sep-‐11 Nov-‐11 Jan-‐12 Mar-‐12 May-‐12 Jul-‐12 Sep-‐12 Nov-‐12 Jan-‐13 Mar-‐13 May-‐13 Jul-‐13 Sep-‐13 Nov-‐13 Jan-‐14 Mar-‐14 May-‐14 Jul-‐14 Sep-‐14 Nov-‐14
NZ $ million
New Zealand Wholesale Deposit Guarantee Scheme Liabili6es
12000
10000
8000
Kiwibank
6000
Westpac
ANZ
4000
BNZ
2000
0 Nov-‐14
Sep-‐14
Jul-‐14
May-‐14
Mar-‐14
Jan-‐14
Nov-‐13
Sep-‐13
Jul-‐13
May-‐13
Mar-‐13
Jan-‐13
Nov-‐12
Sep-‐12
Jul-‐12
May-‐12
Mar-‐12
Jan-‐12
Nov-‐11
Sep-‐11
Jul-‐11
May-‐11
Mar-‐11
Jan-‐11
Nov-‐10
Sep-‐10
Jul-‐10
May-‐10
Mar-‐10
Jan-‐10
Nov-‐09
Sep-‐09
Jul-‐09
May-‐09
Mar-‐09
Jan-‐09
NZ $ million
New Zealand Wholesale Deposit Guarantee Scheme Liabili6es by Currency
12000
10000
8000
Yen
6000
AUD
USD
4000
NZD
2000
So can we be sanguine? •
No, because at some point economic ac+vity will pick up again and at that point the debt buildup could resume unless the banks are restrained or NZ households and businesses decide to operate within their current income
•
Also no because there is a big inflow of offshore funds from reinsurance coming up aMer the Christchurch earthquake, which will tend to hold the nominal exchange rate up and put pressure on domes+c non-‐tradables prices
•
The RBNZ’s response to the la]er will be to raise the OCR, reinforcing the exchange rate overvalua+on and rewarding carry traders while puWng financial stability again in jeopardy
•
There’s definitely a need for something extra in the policy mix
•
The Core Funding Ra+o is a big step in the right direc+on but does not address currency mismatch in the banks’ balance sheets – only the extent of exposure to maturity mismatch
•
Over +me it would be good to see the currency mismatch unwound, at least to some target level low enough to be free of concern about external debt sustainability
•
There is also a good case for restric+ng hot money flows by some variant of a Tobin tax or other regulatory capital controls
•
One way to shiM the policy focus in that direc+on would be to explicitly widen the RBNZ’s objec+ves to include some no+on of exchange rate targe+ng, both real and nominal
•
[That was the key role assigned to the ‘Bank’ in Salter’s original paper – he assigned fiscal policy to deal with infla+on!]
What about government debt? Breakdown of New Zealand Government Debt 300
250
Unspecified gross debt NZD government securi+es on issue
150
Gross foreign-‐currency debt
100
NZD debt held offshore Net foreign-‐currency debt
-‐50
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
1910
0
1905
50
1900
% of GDP
200
Breakdown of New Zealand Government Debt 70 60 50
Unspecified gross debt NZD government securi+es on issue
30
Gross foreign-‐currency debt
20
NZD debt held offshore
10
-‐10 -‐20
2010
2005
2000
1995
0
Net foreign-‐currency debt 1990
% of GDP
40
What does that mean for fiscal policy? • First, there is a lot of headroom for borrowing • Second, there are really interes+ng analy+cal ques+ons about the ways in which (and extent to which) changes in spending and the fiscal balance work their way through (i) to income (hence S and T) via Keynesian channels, or (ii) diretly to the current account (X-‐M-‐π) via financial-‐market channels • Third, state asset sales will draw in offshore funds, pushing the nominal exchange rate up and weakening the Interna+onal Investment Posi+on – perverse from the point of view of helping to raise savings
A couple of lessons for macro policy • Prices ma]er in a market economy => price distor+ons produce distor+ons in economic structure • The RBNZ needs mul+ple instruments to achieve mul+ple objec+ves – or some other agency has to take on the issues that the OCR cannot touch • Infla+on targe+ng causes a lot more collateral damage than its advocates usually acknowledge, in terms of real exchange rate impact of the interest rate • SeWng out deliberately to move the exchange rate down by, e.g., regula+ng bank balance sheets, has an obvious downside: it drives up the prices of tradables and hence reduces real wages in terms of consump+on goods insofar as household budgets contain more tradables than nontradables.
