RBNZ will have to tighten, and hopefully before inflation gets embedded into wage expectations. 2005 left me in 2008 with the impression that RBNZ was happy to take any excuse to avoid its mandate; 2008 reminded me that their eye on the data is a hell of a lot better than mine. And so I'm happier to take RBNZ inaction as suggesting bad things on the horizon than that they're ignoring their mandate; I trust them more now than I did then. I have worried that ETS increases could get embedded into wage expectations; I expect that RBNZ is keeping an eye on things.
For a rather nice parable on the other side, here's Andrew Coleman hoisted from the comments over at TVHE. I, for one, wish he'd start his own blog rather than let gems like this languish over in comments sections:
Once upon a time there was a land where beautiful songbirds lived. The people in the land loved their songbirds, and tried to ensure the population kept increasing. Their efforts were undermined, however, by a population of weasels that would stalk and prematurely kill the birds.I'll never be able to listen to this one the same way again...
The people put their heads together and decided to create a Department for Weasel Control, thinking that if they could minimize the death toll on the bird population the population would grow. The move was not uniformly popular, however, for efforts to kill weasels sometimes temporarily lowered the birth rate of the songbirds. Moreover, it was not clear exactly how the Department would work. In the end, it was decided that the Department would be left to its own devices, subject to being accountable for ensuring the general level of the weasel population was stable. A department head would be hired – popularly known as the chief weasel whacker – and left to get on with it.
The move was controversial. Some people said that the weasel population didn’t really matter if the song bird population was growing. Others didn’t like the reduction in the songbird population that occurred when a full-scale weasel eradication programme was in full swing. Others were enthusiastic, but warned that someone with a paranoid hatred of weasels should be hired as chief weasel whacker to ensure the department did its job well.
One day a new chief weasel whacker was hired, someone with a background in songbird appreciation. From the start he argued that it was both unfair and unnecessary to require him to make sure the weasel population was stable, all that was needed was a requirement that it didn’t grow too fast, maybe not faster than 3 percent in the medium term. The real objective was the increase in the population of songbirds, and the eradication of weasels was just a means to an end. In any case, the weasel population fluctuated naturally, and it was silly to hold him responsible for factors outside his control. Not all people were convinced, but he was good with songbirds.
At first, things weren’t too bad. The songbird population initially increased quickly, after the weasel control programme was eased. Not everyone was happy, as the population of weasels wasn’t stable at all but increasing at nearly three percent a year, but the songbird population increased at a steady pace. Then a major shock occurred, when a weasel disease crossed to songbirds and killed a few. The Chief Weasel Whacker put on hold efforts to control weasels until the songbird birthrate started to increase. Weasel control was neglected for several years
Soon debate broke out up and down the land. Should people be worried that the chief weasel whacker didn’t seem to go around whacking weasels? Or should they just monitor to songbird population? Did it matter that the weasel population had been growing at nearly 3 percent for several years? And what about the original intention of keeping the weasel population stable? It had increased by nearly 20 percent, and never shown any indication of falling. Matters came to head when one year the weasel growth rate couldn’t be counted on the fingers of one hand. The loony weasel haters emerged from the undergrowth making outrageous and funny claims about a world that would be overrun by the Great Weasel who would go around stealing human babies. Fans of the Chief Weasel Whacker denigrated the loons, but others could help but wonder if the original founders had it right after all. Perhaps if you let the weasels increase by a maximum of 3 percent a year, soon they would increase by 3 percent nearly every year. Maybe hiring someone with a paranoid hatred of weasels would have been clever. And maybe there might be a better way of controlling the weasel population than simply trying to whack them after they were born. Perhaps it would be useful to understand weasel physiology and psychology and see if their breeding patterns could be controlled……
Unfortunately I don’t know how the story ends but apparently it might be time to hire a new Chief Weasel Whacker soon, so the story is sure to be interesting.