Dual meaning

The Reserve Bank’s new Policy Targets Agreement (PTA) reflects the Government’s desire for employment to be considered as part of monetary policy decision-making. The responsibility now lies with the Reserve Bank to figure out how to put this loosely worded objective into practice.

Last week, RBNZ Governor Adrian Orr and Finance Minister Grant Robertson signed a new PTA specifying that:

“The conduct of monetary policy will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy.”

The PTA goes on to define a numerical target for price stability, which is broadly unchanged from the previous version: future inflation will be kept between 1-3% over the medium term, with a focus on keeping it near the 2% midpoint. In contrast, there is no numerical target or definition of what constitutes maximum sustainable employment.

The lack of an employment target is appropriate, and is in line with the approach taken by other ‘dual mandate’ central banks such as the Reserve Bank of Australia and the US Federal Reserve. Monetary policy can affect labour market outcomes in the short term, but in the long run the unemployment rate is determined by structural factors that are beyond the control of the RBNZ. What’s more, the sustainable rate of unemployment is inherently unobservable, and may change over time.

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