Creative monetary policy

Dr Eric Crampton
Insights Newsletter
9 August, 2019

They say you should never let a good crisis go to waste.

New Zealand’s employment figures currently look superb. But the trade war between China and the US will not end well for New Zealand, and the Reserve Bank hasn’t much room to cut rates further.

So we might have an opportunity to get creative. What should a central bank do when the Official Cash Rate hits zero and it wants to engage in further monetary stimulus?

I see it as a wonderful research opportunity.

We could always look back to the classics. Milton Friedman suggested ‘helicopter money’ as thought experiment: Why not just load up helicopters with bags of cash and fly across the country scattering money?

While it sounds nice in theory, we might run into a few problems. You see, our currency is printed on polypropylene plastic. Most of us live near oceans. Add in a little wind, and we’ll quickly have undone whatever good was supposed to have come from the plastic bag ban.

But we can do one better. Why not encourage completing the next Census by turning this past one into a lottery? Every day, One Lucky Kiwi could be drawn from the Census registry and given a million dollars, freshly printed. On even-numbered days, the lucky winner could be announced on the nightly news; on odd-numbered days, the winner’s name would be kept secret.

Researchers could track what happens when people are given a million dollars. Are they happier? How much happier? What about the winners’ neighbours, and does it depend on whether the win was announced on television? What happens to the spiritual wellbeing of everyone involved? Statistics New Zealand has actually talked about wanting to measure that last one, but it might need to win a few budget lotteries to follow through with its daft plan. Spirit levels don’t come for free. 

Unfortunately, since the RBNZ’s rules actually preclude external economists with any research interest in monetary policy from serving on the Monetary Policy Committee, we’re likely to waste the research opportunities offered by the coming crisis.

Except one, perhaps: How does a country fare in a recession when its central bank has chased away from the Monetary Policy Committee any outsiders who understand monetary policy? That experiment is much more interesting than anything I’ve proposed.

And we can all look forward to learning the results.

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