The government of New Zealand recently added housing prices to their central bank’s mandate. (I put the mandate at the bottom of this post). Previously, the RBNZ mandate was pretty similar to that of the Fed, 2% CPI inflation and maximum sustainable employment. Not surprisingly, I don’t believe adding housing is a good idea. Nonetheless, it is possible to address the government’s request in a way that would actually improve monetary policy.
I’ve never understood why central banks target consumer prices. Why not all prices? Thus during 2002-06, the CPI did not reflect the fast rise in house prices, because houses are considered an investment good. Then, between 2006 and 2012 the CPI did not reflect the huge decline in house prices. Indeed during some of those years the CPI actually reported housing prices rising faster than the price of other goods, even as the price of new homes was plunging rapidly. Consumer prices are not a good indicator of the state of the economy, to put it mildly. They aren’t even a good indicator of the price of domestically made goods.
Instead of targeting the CPI or the PCE, why not target the GDP deflator, which includes the prices of all goods produced in the domestic economy—including new homes? This sort of index would call for slightly tighter policy during dramatic housing price bubbles, and slightly easier policy when house prices are plunging. This might slightly moderate the volatility of house prices, which is consistent with the goals of the new government policy.
Of course the RBNZ has a dual mandate, and thus also cares a lot about employment and hence real GDP growth. Thus they might want to consider a target that somehow incorporates both the rate of growth in the GDP deflator and also the rate of growth in real output.
Questions for readers: Can you recommend a new target for the RBNZ that would reflect both changes in consumer prices and changes in new home prices, as well as changes in output/employment. Any ideas?
New Zealand was the first country to adopt inflation targeting; maybe they can once again lead the world to a new era of improved monetary policy
PS. Here’s a home in beautiful Queenstown NZ:
Operational Objectives
1. For the purpose of this remit, the MPC’s operational objectives shall be to:
a. keep future annual inflation between 1 and 3 percent over the medium term, with a focus on keeping future inflation near the 2 percent midpoint. This target will be defined in terms of the All Groups Consumers Price Index, as published by Statistics New Zealand; and
b. support maximum sustainable employment. The MPC should consider a broad range of labour market indicators to form a view of where employment is relative to its maximum sustainable level, taking into account that the level of maximum sustainable employment is largely determined by non-monetary factors that affect the structure and dynamics of the labour market and is not directly measurable.
2. In pursuing the operational objectives, the MPC shall:
a. have regard to the efficiency and soundness of the financial system; and
b. seek to avoid unnecessary instability in output, interest rates, and the exchange rate; and
c. discount events that have only transitory effects on inflation, setting policy with a medium-term orientation; and
d. assess the effect of its monetary policy decisions on the Government’s policy set out in subclause (3).
3. The Government’s policy is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.
READER COMMENTS
Rajat
Mar 15 2021 at 4:52am
I don’t know if including new home prices in some measure targeted by monetary policy would satisfy the government’s third sub-clause. Probably, the most that can be said is that, as you suggest:
I’m sure it’s the case elsewhere, but I’m guessing new homes in New Zealand (based on Australian experience) are located on the edges of cities where land prices are low and – especially given ‘our’ relatively high labour and materials costs – the proportion of sale prices accounted for by construction costs is high. Politicians in Oz and NZ want to be able to tell middle-class parents that their children will be able to afford a house (not an apartment) in a suburb vaguely within baby-sitting distance – ie not in the ‘darkness on the edge of town’. Said children and their parents see low policy rates and want to blame the central bank or the government more generally.
Scott Sumner
Mar 15 2021 at 12:49pm
Perhaps, but in America there is a strong correlation between new and used home prices. So I suspect the RBNZ could claim that this meets their new mandate. Of course the weight put on home prices in the GDP deflator might not be the same as the weight the government might have preferred, but the mandate is written in such a way that this is left up to the central bank.
Heather Taylor
Mar 15 2021 at 1:47pm
If we turned this whole thing on its head by making investments other than property more attractive to Kiwis, the housing problem would take care of itself. Hence the ‘new’ regulations for AFAs and RFAs. Which I doubt will work. But a lot of home investment now is the quick flick type. The stock market is a 100% illogical place to put money, that is the issue for Kiwis. It’s out of the investor’s control. A house isn’t, generally, out of the buyer’s control. If you miss the 10 best days on the stock market over the course of 20 years, you may as well have slept on your money. Not so with property. Forget TDs right now. Forget bonds. What other investment options do people know about other than housing? They’re scared of the Greensills and Credit Suisses of this world. I don’t think the Reserve Bank can do much, if anything, until there are options other than property that appear, if not safe, then at least logical to Kiwis. The love affair with property is not stupid. BTW, I used to be one of those babysitters. And I was definitely on the fringe of a city.
Frank
Mar 15 2021 at 2:36pm
Simple: Add a Division of House Building to the Central Bank. Whenever house prices rise too much, build more houses.
jim rauch
Mar 15 2021 at 3:40pm
It’s the biggest fiscal farce ever formulated. To define inflation by an outdated and manipulated cpi and growth by a gdp weighted by house ponzi scheme. It won’t end well.
Mark Barbieri
Mar 15 2021 at 6:49pm
Ooooh…I think I know this one. They could target NGDP. That would automatically set them up to have easy money when growth slow and tighter money when growth is high. NGDP could be targeted by using a robust NDGP futures market so that the central bank could rely on the wisdom of the market to help them steer economic policy.
That wouldn’t help them with there housing issue, but neither will banning investors from buying houses. Is housing costs are growing too quickly, they either need to lower demand or increase supply. Investors aren’t buying houses to leave them empty, so they aren’t really adding to demand over the long term. I don’t know the NZ real estate market, but my guess is that restrictions on the creation of new housing is at the heart of their price problem. I’m not sure how a central bank is supposed to help with that.
Matthias
Mar 18 2021 at 6:41am
Alas, in Australia (and in the UK) you get a tax discount for leaving your properties empty.
marcus nunes
Mar 16 2021 at 7:42am
When Sweden did that in 2010, Lars Svensson was very much against. You see that NGDP veered off track, making the household debt ratio increase!
https://thefaintofheart.wordpress.com/2013/09/10/lars-svensson-is-understandably-furious-with-his-former-colleagues-at-the-riksbank/
Spencer Bradley Hall
Mar 16 2021 at 11:27am
That’s easy. Reestablish the G.6 Debit and Demand Deposit Turnover release (a statistical step child), which was discontinued in Sept. 1996 (due to “The Paperwork Reduction Act (PRA) of 1995” which gave the Office of Management and Budget (OMB) authority over the collection of certain information by Federal agencies). Notice that the jobless recovery of the 1990-1991 recession ended when monetary flows bottomed.
https://monetaryflows.blogspot.com/2010/07/monetary-flows-mvt-1921-1950.html
Like the S&L crisis, the GFC bubble would have stood out like a sore thumb.
Ed Fry was the manager of the longest running time series at the FED during this time. He never knew how the recipients used it.
“The Bank Credit Analyst” BCA Research used it in their debit/loan ratio time series.
See Dr. Paul Spindt: “New Measures Used to Gauge Money supply WSJ 6/28/83”, and Dr. William Barnett’s “Divisia Monetary Data”
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