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DEC 10

Any Future for Exporters?

The policy framework pursued by New Zealand for the past twenty years or more essentially leaves the exchange rate as the loose end of the policy framework. This is what is meant by a “clean” float the theory says there will be equilibrium and currencies will tend to balance with reference to the trade flows. Sadly there is no equilibrium, and ever increasing speculative capital flows exacerbates the problem.

The monetary policy as operated in New Zealand has only succeeded in controlling headline inflation; inflation in the non-traded economy has been impervious to changes in interest rates. Only the absence of price stability in the traded economy has provided headline inflation rates inside the policy bands. The links below give some data in this regard.

The International Monetary Fund and others are coming to the view that exchange rate volatility is more damaging to the real economy than the level of the exchange rate. A clean float ignores both level and volatility, in so doing removing any predictability or stability from the traded economy.

Officials and politicians wedded to a clean float develop an obsessive commitment to that choice and revert to “there is nothing to be done” in times of trouble. Hands off becomes a way of life and troubles are characterised as being in the domain of others.

There are policy choices through a dirty float all the way to a managed currency, again the IMF reports that small economies at managed end of the spectrum have performed better than the ostensibly clean float economies.



In a clean float pressure on the currency results from higher interest rates particularly when the central bank chooses to be heavily reliant on the overnight cash rate mechanism. Currency pressures are amplified if fiscal policy sees Government operating in deficit and choosing to borrow, absence of local savings, offshore.

This does not have to be the case, but a balanced suite of changes are needed to begin to improve the operating conditions of the traded economy.

• Recognise, embrace and implement the realisation that central planning and winner picking will fail in the high value add sector. Face the fact that policy settings matter and an unpredictable exchange rate has a massive detrimental impact on the real economy.

• Monetary Policy: Managed exchange rate - lower interest rates substituted by loan to value ratios, robust core funding ratios and capital inflow controls.

• Fiscal Policy: lower and broader tax rates, including effective capital taxes.

• Incentivised savings to individual account to bolster local savings.

• Investment Incentives for high value exports on the same basis as other developing economies (level playing field) – skills development, R&D support, depreciation rates, patent costs and investment incentives for innovation.


As there is no equilibrium in currency it is best to apply the common sense test, you know your currency is overvalued if those activities that have significant comparative advantages cannot make a living on the world stage – meat and fibre farming.

tags: monetary policy, fiscal policy
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