New Zealand can still use conventional methods to kick-start economy rather than just printing more cash

What does Russel Norman really want when he suggests printing a few billion dollars? His proximate objective is a lower exchange rate, but that is only a means to an end.

Presumably he wants greater employment, faster growth in living standards and for particularly the poor to be better off quickly. That is probably what all political parties want, not just now but always. However, there are no quick tricks. If there were, governments would have been using them already.

Fortunately, we do slowly learn, and one realisation from the global financial crisis is that it is possible to use measures to reduce the chance of asset price bubbles and their subsequent unpleasant deflation. These macro-prudential tools are steadily being added to the Reserve Bank's toolkit.


It is therefore sensible to ask if there are other such measures available. The Reserve Bank did that in detail during the mid-1990s' rapidly rising exchange rate, and it has done it again since.

The problem of taking special stimulatory action in the short run is that it has to be paid for in the longer term. Sometimes that is exactly the right thing to do, as the short-term pain is greater than the long-term spread-out pain.

That is the asset sales debate ... investing more in better infrastructure for education and health in the short term, providing a contribution to faster future growth and better standards of living now. But it comes at a cost.

What about unconventional monetary policy? Is that a trick whose benefits exceed the cost?

Printing money is usually a last resort that seriously troubled countries use to stave off collapse, and not some mysterious trick that other nations have conjured up to achieve quick riches. More often than not it is disastrous, which is why it is not permitted under the EU Treaty.

New Zealand has definitely not run out of opportunities to use conventional monetary and fiscal policy if it feels the economy faces a lack of demand. So why move to the unconventional now?

Quantitative easing is used when short-run nominal interest rates have been lowered to zero and it is still necessary to expand the economy. If the central bank then buys longer dated bonds or other financial securities (including commercial paper or mortgages from the private sector), it may continue stimulating the economy.

Evidence from a symposium being published by The Economic Journal suggests that this is achieving a little in the United Kingdom, the United States and the Euro area.


The problem is that it only works well if people fear major inflation and rush out to buy before prices rise. Once growth re-establishes again, the central bank sells all assets and mops up the extra money before inflation gets out of hand. That of course explains why it doesn't really work. If inflation is going to be headed off, then why buy now? Hence the weak effect.

Thus quantitative easing needs to be on a massive scale if it is to work. What central banks worry about now is how to extricate themselves elegantly from massive distortion, when the world economy turns round for the better. It has not been done before, so the chances of it going badly are high. After all, the easy monetary policy after the dotcom boom and the 9/11 disaster have turned out to be a significant cause of the present crisis.

Dr Norman's proposed scheme goes further. The Reserve Bank will buy Government earthquake recovery bonds to help pay for the Christchurch rebuild, and buy overseas assets to restore the Earthquake Commission's Natural Disaster Fund. Rather than borrowing government money to do this, it will simply create it. There lies the trick.

Maybe investors won't see through this, there will be little short-run impact and the inflationary pressure can be quietly reduced by restraint in the upturn. However, it could also weaken international confidence in the central bank's independence and New Zealand's commitment to fiscal prudence, hence increasing the price of new and renewing debt. Do we feel lucky?

If all we want to do is expand the economy and put downward pressure on the exchange rate, then the conventional tools are all there. We can simply build up foreign exchange reserves. We have 10 unused notches for reducing interest rates. Our national debt is low by international standards. We could double it before we have as much trouble as the main European countries.

The question is: would this have much real impact? Most of the emphasis these days is not how much you spend but how well you spend it. It is a mug's game trying to compete with low labour and low energy-cost countries.

I don't think there is a silver bullet but it would be marvellous if there were.

David Mayes is Professor of Finance with Auckland University's Business School and a former chief economist with the Reserve Bank.