WELLINGTON - Last year's recession cannot be laid at the door of the Reserve Bank's use of the monetary conditions index (MCI), bank governor Don Brash insists.
He was responding yesterday to a point made by MP Ian Revell that while Australia last year had enjoyed lower interest ratesand enviable growth, in New Zealand under the MCI framework the currency fall had driven interest rates up when the country was in recession.
Dr Brash, appearing before Parliament's finance and expenditure committee, said the MCI had been adopted as a policy instrument in mid-1997 only six months before the economy went into recession.
"Given the normal lags between monetary policy action and the effect on the real economy it is quite unlikely the MCI had any material effect on that," he said.
"If monetary policy shares any part of the blame for the recession in the first part of 1998, and I'm not convinced it does, it is monetary policy in 1996 and the first part of 1997 which is to blame."
New Zealand monetary policy in the mid-1990s had been quite a lot tighter than in Australia, he said. That was partly because of a policy mistake on his part in not tightening early enough, in 1993. The tightening, when it came, was both more aggressive and longer-lasting than it needed to have been.
The resulting economic slowdown had been expected to amount to a soft landing, with growth slowing to around 2 per cent in 1998. But two unexpected events, the Asian crisis and the drought, turned the soft landing into a hard one and the economy went into a brief recession.
"Australia by contrast came out of the recession of the early 1990s much more gradually. Its policy was therefore not nearly as tight as ours in the mid-1990s and it was still growing quite strongly in 1997, with the consequence that the Asian crisis if anything avoided the need for monetary policy to be tightened.
