Working Papers

Who’s Afraid of NZ’s Current Account Deficit?

New Zealand’s Q4 current account deficit is expected to come in at around 9% of GDP when it’s released tomorrow.  The fact that a small open economy like NZ can run such a large deficit should be reassuring.  It should also not be surprising.  RBA Governor Macfarlane has noted that Singapore ran current account deficits averaging 15% of GDP for a decade, in the context of a much less flexible exchange rate and capital account regime. 

Alan Wood notes that ‘the bigger risk is that the RBNZ has raised rates to a level that turns out to be economic overkill,’ an argument we have also made on these pages.  The whole point of having a floating exchange rate and open capital account is that monetary policy does not need to concern itself with considerations of external balance or prop up the currency, yet the current account has featured heavily in the RBNZ’s policy discussion of late.  As Australia’s experience in the late 1980s and early 1990s demonstrates, external imbalances only become scary when they become a preoccupation of policymakers.

posted on 22 March 2006 by skirchner in Economics

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Would you agree with any of the following -

As short-term interest rates are the primary determinant of currency price changes, and currencies are more volatile than consumption, a raise in official rates, or failure to lower them, in an economy with significant external trade would more likely worsen that economy’s current account balance due the appreciation of the currency and concomitant increase in imports and decrease in exports.


Posted by cb  on  03/23  at  01:39 AM

Yes, its often occurred to me that the last thing you need when you have a large CAD is a stronger currency resulting from higher interest rates.

Posted by .(JavaScript must be enabled to view this email address)  on  03/23  at  10:55 AM

Yes, raising interest rates to combat a current account deficit is counter-productive, as it encourages the capital inflow that is the flip side of the CAD.

Posted by skirchner  on  03/23  at  03:24 PM

Henry Thornton says today:
“The rise in US cash rates has been a major factor in the weakness of the Australian and New Zealand dollars. So far at least, there has been no great effect on interest rates in general, but this cannot be too far off in Australia and especially New Zealand if their currencies keep falling at recent rates.”

Why on earth does he think the AUD and NZD need defending by their central banks?  I would have thought the best thing that can happen to the NZ economy is a lower NZD.

Posted by .(JavaScript must be enabled to view this email address)  on  03/28  at  01:50 PM

When Lee Kwan Yu went to the ANU in 1980, he declared that Singapore’s per capita output would surpass that of Australia in 20 years. A bold claim for an island without vast natural resources to convert to FX to buy productive capital (like Australia). Yu was duly laughed at by (most) of the flat-earth economists in attendance. He was rudely mocked. Yet, IT TOOK SINGAPORE JUST 15 YEARS TO SURPASS AUSTRALIA.

How did they do it? I won’t be giving a lecture here, yet one can discern similarities with the Celtic Tiger (Ireland) and countries such as Taiwan and South Korea. New Growth Theory plays an important role.

CAD’s that are used for building productive assets that integrate an economy with global technology and industrial supply chains are fine.

CAD’s built on massive foreign intermediation (witness the 70% rise in loans by banks in the RBA Bulletin) used to underpin drastic house price inflation and home renovations, are somewhat different. {See what Adam Smith actually says here, regarding housing expenditure and (FX) producing capital}.

To the flat-earther’s that don’t believe in a housing bubble/ misallocation, just witness what the Citibank housing evaluation method says (simply measuring rental yield against interest-only debt servicing costs) {These guys only manage billions on a daily basis}. It implies an ALL TIME bubble. Witness what the OECD says about Australia’s housing prices/ misallocation.

When Asia is finished bank-rolling the speculative, debt-binging Ango-Saxon economies, to buy Asian capital intensive products, we will see which economies are the most productive.

Will we ever see a Nokia, Acer, Samsung, LG, Ericssen in Australia? Somehow I doubt it. Even after the RBA has failed in its Charter of ‘Stability of Currency’ (as the TWI collapsed from 100 in 1970 to 61 today), our economy is still reliant on increasing (net) debt and equity liabilities. We’re still not even productive enough to have a merchansise surplus sufficient to finance our foreign interest and dividend obligations. This is despite massive reserves of ‘god given’ FX just lying in the ground (with a terms-of-trade boom). What a joke.

Maybe Lee Kwan Yu was right. Maybe we will be the “...poor white trash of SE Asia”.

Posted by .(JavaScript must be enabled to view this email address)  on  03/29  at  07:44 PM

Falling currency leaves NZ vulnerable

“In an attempt to rein in consumer spending, the Reserve Bank has raised interest rates nine times in two years, to 7.25 per cent – by far the highest in the OECD. The medicine has taken a long time to work, with lenders engaged in a fierce pricing war and four-fifths of borrowers on fixed rate mortgages. But the high interest rate sent the value of the kiwi soaring to 74 cents against the dollar – its highest level in 23 years – compounding the trade deficit by making imports cheaper and exports more uncompetitive.”

Well d’uh!

Posted by .(JavaScript must be enabled to view this email address)  on  03/31  at  12:38 PM

Nothing like putting your country in a recession and putting people out of work to rein in those annoying home buyers and import consumers…. oops, the trade deficit got worse!  Sir Keynes, what’s going on?

Posted by cb  on  04/01  at  01:12 AM

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