Should New Zealand do anything in the face of global shocks?
Posted December 5, 2008on:
The data is changing so quickly that it gives me an intense sense of fatigue. As a result, I thought I would ask a question of our readers and rely on your cumulative intellect 🙂
Should New Zealand do anything in the face of what is primary shocks
This is a discussion type post, where I’d like you guys to tell me what you think. The aim is to “describe” the situation, and if (and what) policy could be appropriate. I will post a quick little ditty under the tab which can act as some sort of starting point I guess 🙂
BTW – even if you don’t have much to say here, say it anyway … please 😉
New Zealand is being battered from two primary channels:
- Credit market,
- Terms of trade.
Now, fundamentally it is all about the credit market. A shock to the system of this scale would lead to structural changes in the way risk is allocated and more generally the way funds are allocated. This change in turn has lead to some weakness in our terms of trade.
In so far as parts of these shocks are permanent – there is nothing we can do, we have to accept a lower income and move on.
However, there are temporary components. We suspect (although I am never convinced) that parts of the world are suffering from some form of “demand deficiency” which will only be temporary. Temporary “credit constraints” exist. Furthermore, the bad headlines will knock confidence, which will in turn decrease activity directly in our own economy.
In the temporary confidence case monetary policy should act (and is acting). Furthermore, a temporary hit to our terms of trade is something that the government could “buffer” us from – as in a credit constrained environment it simply has better access to credit. This of course also holds more generally for temporary “credit constraints”.
If we could identify and target these temporary issues, New Zealand policy could improve outcomes right?
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