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Fiscal vs Monetary Policy: RBA Independance and Inflation Target not Sacrosanct? Chris Joye; Inflation targeting facing unprecedented challenge. Can the Reserve Bank of Australia abandon inflation target?
Topic Started: 3 Aug 2011, 10:16 AM (6,288 Views)
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http://christopherjoye.blogspot.com/2011/08/strong-retail-flavour-on-rba-board.html

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Strong 'retail flavour' on RBA Board creates dovish bias

A good article by Michael Dwyer in the AFR. He notes, as I have, that the conflicted business executives on the RBA Board hold a voting majority, and questions whether they have been responsible for the RBA keeping policy on hold while both experiencing and forecasting above-target inflation. The tom-toms have started, as I expected. This is not great news for the RBA's credibility:

"[J]ust six days after the release of figures showing the consumer price index had jumped to a two-year high of 3.6 per cent, the Reserve Bank stayed its hand.

It was the eighth consecutive decision by policymakers to keep interest rates on hold and came in the face of the sort of inflationary pressures that normally ring alarm bells in the corridors of the central bank’s Martin Place headquarters.

Inflation is now well above the Reserve Bank’s target band of between 2 per cent and 3 per cent. While the central bank’s decision now appears justified, given the past week’s turmoil on global financial markets, retailers must have felt at least partially vindicated.

“Structural change is something people rarely find comfortable in the short term, even though a capacity to adapt is a characteristic displayed by the most successful economies,” Stevens said last month.

Yet it remains to be seen whether the five business people who hold a majority on the nine-member Reserve Bank board see structural change in quite the same way. The current board membership has a particularly strong retail flavour.

Fairfax Media chairman Roger Corbett, who has been involved in the retail industry for four decades including a stint as chief executive at Woolworths, has been a member since late 2005 and will remain on the board until 2015.

Earlier this year Corbett described the economy as “bipolar”, noting that the average Australian could rightly ask, “How is it we are going through the biggest resources boom in the nation’s history and at the same time I am finding it quite hard to make ends meet?”

Then there is Jillian Broadbent, appointed to the board in 1998 and its longest-serving member, who has been a director at Woolworths since the start of this year and was previously on the board of Coca-Cola Amatil.

The votes of the Reserve Bank board are not published, unlike at the Bank of England, so it’s impossible to know how close this month’s decision to keep rates on hold was. But the central bank has only raised its cash rate once since May last year, despite the knowledge that inflation was destined to creep above its target band.

“The modelling suggests monetary policy typically has its largest effect on the economy with a six- to 18- month lag, so retrospect would suggest that the Reserve Bank should not have hesitated last October and rates should have been lifted twice in the second half of 2010,” says HSBC chief economist Paul Bloxham, who worked at the central bank for 12 years.

“That would have put additional downward pressure on inflation and perhaps given the Reserve Bank more room to move this year or next in the event of a [major] downturn.”
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Shadow
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Catweasel
4 Aug 2011, 10:03 AM
Catweasel say a Joye now going the obviously mad as batshit. A RBA go from best central manipulator in a world to corrupt banana republic despots in less than a year!

As a theater, it a absolutely brilliant.
I think Chris' view is that the makeup of the RBA board has changed and become more dovish over time, so while they were the best central bank in the world previously, now there aren't enough hawks remaining on the board.

I agree with Chris on most things, but not on his recent interest rate position- i.e. his position that it is the RBA's duty to stamp down on inflation, now.

As I said before, people and jobs come before an arbitrary inflation target. Inflation targeting is just one mechanism that the RBA has sometimes used (since 1993) to achieve its primary objectives, being...

1. The stability of the currency of Australia
2. The maintenance of full employment in Australia
3. The economic prosperity and welfare of the people of Australia

Of those, points 2 and 3 are the most important.

Point 1 sounds like a nice objective, but it is kind of meaningless. If 'stability' is a reference to the AUD strength relative to other global currencies, then the Australian currency is anything but 'stable', and never will be, regardless of what the RBA does with interest rates. If the USA decides to devalue their dollar, do we have to do the same in order to keep the AUD 'stable'? Which currencies should we keep our currency stable in relation to?
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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davel
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Shadow
18 Aug 2011, 11:26 AM
Catweasel
4 Aug 2011, 10:03 AM
Catweasel say a Joye now going the obviously mad as batshit. A RBA go from best central manipulator in a world to corrupt banana republic despots in less than a year!

As a theater, it a absolutely brilliant.
I think Chris' view is that the makeup of the RBA board has changed and become more dovish over time, so while they were the best central bank in the world previously, now there aren't enough hawks remaining on the board.

I agree with Chris on most things, but not on his recent interest rate position- i.e. his position that it is the RBA's duty to stamp down on inflation, now.

As I said before, people and jobs come before an arbitrary inflation target. Inflation targeting is just one mechanism that the RBA has sometimes used (since 1993) to achieve its primary objectives, being...

1. The stability of the currency of Australia
2. The maintenance of full employment in Australia
3. The economic prosperity and welfare of the people of Australia

Of those, points 2 and 3 are the most important.

Point 1 sounds like a nice objective, but it is kind of meaningless. If 'stability' is a reference to the AUD strength relative to other global currencies, then the Australian currency is anything but 'stable', and never will be, regardless of what the RBA does with interest rates. If the USA decides to devalue their dollar, do we have to do the same in order to keep the AUD 'stable'? Which currencies should we keep our currency stable in relation to?
The question is, though, what timeframe do you use to assess the achievement of these goals?

My understanding was that the idea of having an independent CB was to have a more long-term view i.e. not respond to the political cycle. Long-term prosperity requires inflation to be nipped in the bud (most economists seem to agree on that).

All the RBA is then doing by turning a blind eye ("looking through") is responding to the political mood of the moment. If they allow the inflation genie out of the bottle then the long-term damage could be a lot worse.
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Shadow
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davel
18 Aug 2011, 11:44 AM
The question is, though, what timeframe do you use to assess the achievement of these goals?

My understanding was that the idea of having an independent CB was to have a more long-term view i.e. not respond to the political cycle. Long-term prosperity requires inflation to be nipped in the bud (most economists seem to agree on that).

All the RBA is then doing by turning a blind eye ("looking through") is responding to the political mood of the moment. If they allow the inflation genie out of the bottle then the long-term damage could be a lot worse.
Why is 2-3% inflation OK, but 3-4% is out of the bottle? What would happen if inflation was allowed to be at 4-5% for a year or two?

Don't you think most people would prefer a year or two of slightly higher than normal inflation, if it means keeping their job?

I don't think inflation is a major concern when Australia is quite likely to already be in recession right now, and most of the western world is in recession (not just talking about a 'technical' recession here, but a recession characterised by high or rising unemployment and low consumer confidence/spending).

The type of inflation we're seeing in Australia will not be controlled by high interest rates anyway. The inflation is driven by global factors and will fall as a result of those same global factors reversing as the economic 'recovery' falters across Europe and America.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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davel
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Shadow
18 Aug 2011, 11:58 AM
davel
18 Aug 2011, 11:44 AM
The question is, though, what timeframe do you use to assess the achievement of these goals?

My understanding was that the idea of having an independent CB was to have a more long-term view i.e. not respond to the political cycle. Long-term prosperity requires inflation to be nipped in the bud (most economists seem to agree on that).

All the RBA is then doing by turning a blind eye ("looking through") is responding to the political mood of the moment. If they allow the inflation genie out of the bottle then the long-term damage could be a lot worse.
Why is 2-3% inflation OK, but 3-4% is out of the bottle? What would happen if inflation was allowed to be at 4-5% for a year or two?

Don't you think most people would prefer a year or two of slightly higher than normal inflation, if it means keeping their job?

I don't think inflation is a major concern when Australia is quite likely to already be in recession right now, and most of the western world is in recession (not just talking about a 'technical' recession here, but a recession characterised by high or rising unemployment and low consumer confidence/spending).

The type of inflation we're seeing in Australia will not be controlled by high interest rates anyway. The inflation is driven by global factors and will fall as a result of those same global factors reversing as the economic 'recovery' falters across Europe and America.
I'm not necessarily saying they should raise rates, and I agree much of Aus in recession.

My point is simply that some people quote the mandate and say they should cut to benefit the economy, but over what timeframe should we assess their success? My view is 5-10 years. We have enough short-termism in the govt and in the sharemarket, somebody needs to be looking at the big picture. Have a look at Greenspan to see the trouble you can get into if you pay too much attention to current sentiment.

Also, this so-called imported inflation and things they cant influence is bollocks IMO. Yes, they can't control it but the point is to take heat out of the economy so OTHER prices dont inflate as well as the ones they cant control.
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Strindberg
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Shadow
18 Aug 2011, 11:26 AM

1. The stability of the currency of Australia
This duty of the RBA is enshrined in law - it is in the Reserve Bank Act.

However, it can mean one of two things.

1. It can be taken as referring to the stability of the purchasing power of the currency.

This interpretation however is contradicted by the RBA/Treasury agreement to pursue a positive inflation target of 2-3%. Only a target of 0% inflation could be consistent with (1). If the "stability of the currency" is intended to ensure the stability of the purchasing power of the currency then the RBA/Treasury agreement is clearly in conflict with the Reserve Bank Act and thus illegal.

2. It can be taken as referring to the stability of the value of the AU$ versus other currencies.

This interpretation results in the conclusion that the RBA have failed in their duty. The Australian dollar has doubled in value over the last 10 years against major currencies such as the US dollar and the GB pound.

Either way, the RBA have failed in their duty.
Housing costs to Income broadly unchanged since 1994 - re-ratified here
The People of Australia have the highest median wealth in the World
2002-2012 10 year house price growth the SLOWEST since 1952-1962
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Strindberg- Finally I agree with your comments, Inflation is a hidden tax on the people it serves no meaningful purpose. The inflationista's don't realise this is a very dangerous game for central banks to play. Once the population has high inflationary expectations inflation tends to gain momentum on its own. The cure will be more painful than the disease.
We are beginning to see the folly of Keynes, his theory is essentially right. BUT you cannot trust central banks anywhere in the world to price capital correctly in the economic boom times, this is where the mistake is made. Turning to Keynes to stimulate an over stimulated economy will just make the situation worse, it is the malinvestment of capital that created the problem. More of it will not solve it.
Anyone got a ZIM 10,000,000,000 note? how did that work out.




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davel
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Enjoy The Ride
18 Aug 2011, 06:27 PM
Strindberg- Finally I agree with your comments, Inflation is a hidden tax on the people it serves no meaningful purpose. The inflationista's don't realise this is a very dangerous game for central banks to play. Once the population has high inflationary expectations inflation tends to gain momentum on its own. The cure will be more painful than the disease.
We are beginning to see the folly of Keynes, his theory is essentially right. BUT you cannot trust central banks anywhere in the world to price capital correctly in the economic boom times, this is where the mistake is made. Turning to Keynes to stimulate an over stimulated economy will just make the situation worse, it is the malinvestment of capital that created the problem. More of it will not solve it.
Anyone got a ZIM 10,000,000,000 note? how did that work out.




Enjoy The Ride!
+1.

" BUT you cannot trust central banks anywhere in the world to price capital correctly in the economic boom times, this is where the mistake is made"

Thats the key really, they ignored the run-up in asset prices during boom times when they really should have killed it dead with rate-rises. Instead they swallowed the kool-aid that we had "abolished boom and bust" (G Brown said it, but many believed it) and were entering a new paradigm of steady growth underpinned by low IRs.

So the lesson is that CBs get too complacent in the boom times and then too accomodating in the bust times.

It probably really WOULD be better if they focused just on inflation and where that measure INCLUDES inflation in asset prices.
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Elastic
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Got to agree that the failure of central banks to target asset prices has resulted in some serious problems.

Shadow, in regards to letting inflation rise, the problem is that workers see prices rise and start demanding wage rises to compensate.
Wage rises less than inflation is a wage cut and everyone knows it.
Only a rat can win a rat race.

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Shadow
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Elastic
19 Aug 2011, 11:47 AM
Shadow, in regards to letting inflation rise, the problem is that workers see prices rise and start demanding wage rises to compensate.
Wage rises less than inflation is a wage cut and everyone knows it.
Are you saying this doesn't happen when inflation is in the 2-3% band, but it starts happening when inflation moves to the 3-4% band?
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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