KEY POINTS:
It is a challenging set of issues the finance and expenditure select committee's members have set themselves as they embark on their inquiry into monetary policy.
Whether they have bitten off more than they can chew remains to be seen.
But they will have to turn their minds to these questions:
* Has something gone fundamentally wrong with the monetary policy framework since the late 1980s?
* Were the "give growth a go" changes to the policy targets agreement five years ago a mistake?
* Or is it just a case of a poor workman blaming his tools?
* Are we confronting the downside of globalisation or are the problems closer to home?
* Monetary policy needs mates, as the saying goes, but have they been letting it down?
One person who suspects something has gone fundamentally awry, evidently, is Michael Cullen.
In a speech this month, the Finance Minister said the consensus had been that the monetary policy framework did not have an impact on long-run growth.
"In other words, monetary policy keeps the economy stable by moderating economic cycles without impacting on the sustainable rate of growth," he said.
"My overriding concern is that this view no longer holds."
Even with its recent falls, from a stratospheric US81c, the dollar remains significantly over-valued and has been for much longer than in previous cycles.
The kiwi has been above US70c for less than 7 per cent of the time since it floated in 1985 but it has been above US70c for most of the past three years.
Cullen said the risk was that people decided exporting or investing in exporting was just not worth it.
One of the submitters to the select committee, former Waikato University vice-chancellor and British Labour Party luminary Bryan Gould, warns that, in the long run, regularly recurring over-valuation of the currency could change the culture.
"As a country, we cease to be interested in making new wealth because it is just too hard. Our best brains go into the professions or domestic industries like retailing, where there is less threat from international competition, and shy away from the internationally traded sector where the real prospects for growth lie."
Other submitters question another basic pillar of the regime, a freely floating exchange rate.
Former Fletcher Building and Fletcher Forests chief executive Terry McFadden, who has served as an external monetary policy adviser to the Reserve Bank, suggests a careful study of alternative approaches, including a crawling peg or currency union with Australia.
PSIS chief executive and former National Bank chief economist Girol Karacaoglu advocates the Singaporean model of managing the exchange rate rather than interest rates as a better means to the end of price stability.
But the hurdle for radical change would be high.
No doubt other countries do fine with other regimes. But inevitably there are differences which make a difference between them and us.
And weight has to be given to the fact that flexible inflation-targeting regimes for monetary policy, and floating exchange rates for that matter, are the norm among developed countries.
The Hippocratic oath begins with the injunction: First do no harm. Any change which risked a return to endemic inflation would be harmful.
Inflation hawks at the Bank of New Zealand argue that the problem lies with the way the Reserve Bank has been implementing policy.
They accuse the bank of consistently over-estimating the economy's capacity for non-inflationary growth.
"This meant that interest rates were left too low for too long. Had the bank operated more aggressively earlier on we might have been able to avoid the extremes we now face, which include interest rates being higher for longer than needed to be the case, excessive house price inflation, the currency being stronger for longer and the eventual correction being more abrupt than needed."
The select committee at least needs to eliminate the possibility that the BNZ view is right, that it is the driving and not the vehicle that is at fault, before recommending any fundamental changes to the latter.
In his own defence, Governor Alan Bollard could argue that he has had to contend with an adverse international environment.
* The US Federal Reserve's easing in the wake of the tech wreck and September 11, which slashed the Fed funds rate from 6 per cent to 1 per cent, a 50-year low, went too far and lasted too long, flooding the world with cheap money.
That allowed New Zealand home buyers to pretty much ignore Bollard's official cash rate rises by borrowing imported funds at what they regarded as low fixed rates for longer periods.
But that was then and this is now. Higher global interest rates were already giving the Reserve Bank more traction even before credit markets became more sensitive to risk.
* The interest rate differential driving the carry trades which have driven the exchange rate so high is not just a matter of high rates here but absurdly low interest rates in Japan.
* Big moves in commodity prices, especially oil on the import side and dairy on the export side. The net effect is the best terms of trade in a generation and that is the sort of silver lining which comes with a cloud, in the form of a higher trend exchange rate.
While nothing can be done about such factors, some of the problems monetary policy faces domestically are within reach.
Many of the submitters offer lists of government policies which they argue have required the Reserve Bank to work harder to curb inflation.
The Chambers of Commerce, for example, cite an increased fiscal stimulus, higher labour costs (from the Holidays Act, minimum wage and KiwiSaver), higher regulatory cost ( in banking, telecommunications, electricity and food safety) and the effects of the Resource Management Act and Building Act in increasing construction costs.
They also note that central and local government charges have risen more than twice as fast as the overall consumers price index during the past five years.
More fundamentally, the decline in productivity during the past few years has gone further than can be explained by purely cyclical factors such as labour hoarding.
Government policy needs to be subjected more often to the test: Will this make the economic boat go faster or slow it down?
The question is how to do that.
An independent body like Australia's Productivity Commission might help.
But what really needs to happen is for that way of thinking to be hard-wired into the policymaking process.
And it will take more than a select committee report to bring that about.
