Tuesday, 28 August 2012

One instrument can't achieve two goals

From Don Brash
The Reserve Bank has got only one instrument, and that's monetary policy. You can't deliver two objectives with one instrument, and David Parker at least should have the brains to know that. Apparently not.
In short the RB can't control both inflation and the exchange rate.

The idea that some economic quantities can be classified as targets and others as instruments goes back to the 1950s and is due to the Dutch Nobel Prize winning economist Jan Tinbergen. He argued that targets are those macroeconomic variables the policy maker wishes to influence, whereas instruments are the variables that the policy maker can control directly. The important point that Tinbergen made, but David Parker has missed, is that achieving the desired values of a certain number of targets requires the policy maker to control an equal number of instruments.

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