Damien Grant interviews Michael Reddell, an independent economic commentator and blogger, about the history of monetary policy, currency debasement, the Phillips curve, the wages and prices freeze, managing inflation expectations, central bank independence, government deposits, and the relevance of the Taylor rule in today's economic context. They also discuss the critique of monetary policy mistakes and the significance of central bank independence.
Monetary policy cannot address unemployment alone; other measures like labor market policy are required.
Inflation expectations play a crucial role in the relationship between wages, unemployment, and inflation.
Monetary policy reforms in New Zealand aimed for low and stable inflation, influenced by institutions like the Bundesbank.
Deep dives
History of Monetary Policy
The podcast episode delves into the history of monetary policy, starting from Diocletian in Rome and discussing the challenges faced by governments due to fiscal pressures and currency debasement. It explores the concept of price control and the relationship between unemployment and wage inflation discovered by Bill Phillips. It also touches on the limitations of using monetary policy to manipulate the unemployment rate and the role of other factors like labor market policy. The episode mentions the New Zealand government's attempts in the late 1990s to regulate wages and prices, similar to the policies implemented by Richard Nixon in the US years earlier.
The Phillips Curve and Inflation Expectations
The podcast explains the relationship between wages and unemployment, as documented by Bill Phillips. It discusses the belief among policymakers and economists in the 1960s that there was a trade-off between unemployment and inflation. However, it points out that inflation expectations played a crucial role, as people adjust their behavior and recognize the increase in inflation rates. This led to the realization that there is no long-term trade-off between inflation and unemployment, and that addressing unemployment requires other measures like labor market policy and welfare reforms, which are outside the scope of central banks.
Monetary Policy Reforms in New Zealand
The episode explores the monetary policy reforms in New Zealand during the late 1980s and early 1990s. It highlights the shift towards central bank independence and the decision to delegate monetary policy decisions to experts. The conversation discusses the rationale behind the reforms, including the desire for low and stable inflation, as well as the broader public sector reforms that aimed to improve accountability and efficiency. It mentions the role of institutions like the Bundesbank in shaping the reform ideology and the challenges faced during the implementation of the new monetary policy framework.
The Limitations of Large-Scale Asset Purchase Programs
The podcast episode discusses the use of large-scale asset purchase programs, commonly referred to as quantitative easing (QE), in response to economic crises like the global financial crisis (GFC) and the COVID-19 pandemic. It acknowledges that the effectiveness of such programs in controlling inflation and stimulating economic growth is debatable. It highlights the risk associated with these programs due to potential financial losses incurred by central banks, using the example of the Reserve Bank of New Zealand's losses from bond purchases during the COVID-19 pandemic. The episode also raises concerns about the lack of serious analysis regarding the financial risk associated with such programs.
The Taylor Rule and Monetary Policy
The podcast briefly mentions the Taylor Rule, a monetary policy guideline that suggests a relationship between interest rates, inflation, and output. It discusses how the rule can provide a benchmark for policy conversations but cautions that the rule relies on certain assumptions and estimates that may not be accurate. It emphasizes the importance of considering factors like the neutral rate and potential output in determining appropriate monetary policy actions and highlights the uncertainty involved in making such decisions.
Michael is an independent economic commentator, blogger, and stay-at-home parent. His regular blog, Croaking Cassandra, focused on economics and public policy (especially in New Zealand) and am researching issues relating to New Zealand's longer-term economic performance.
Tune in as controversial writer and podcast host, Damien Grant, interviews a wide selection of interesting and entertaining individuals, authors, business people, politicians and anyone else actually willing to talk to him.
