Reserve Bank should target the housing bubble

Now that the world has avoided going over the financial cliff, at least for now, the powers-that-be are doing a post-mortem of what went wrong.

The International Monetary Fund (IMF) has just produced a 42 page paper titled "Central Banking Lessons from the Crisis" that makes for an interesting read.

It diagnoses a bunch of problems, including keeping interest rates too low for too long, not watching the shadow banks, and light handed regulation.

But it also raises a topic of great interest in New Zealand, where a doubling of property prices between 2002 and 2008 distorted our economy in favour of consumers over producers, and sucked in around NZ$100 billion of foreign debt. This buildup of hot air in an asset bubble became a key factor in the Reserve Bank's thinking over that period, albeit indirectly.

The Reserve Bank shied away from deliberately targeting this asset bubble in its monetary policy and instead had to deal with the fallout using just one tool, the Official Cash Rate (OCR).

To read the full NZ Herald story click here

Posted: 27 Jul 2010

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