Monday, May 05, 2008

Don Harding on RBA policy

My colleague Don Harding has a forceful piece on monetary policy in today's Australian. He argues that the RBA has not tightened monetary policy since the real rate of interest has fallen slightly. True Don but those nominal increases in interest rates do impact on consumers faced with assets not appreciating at the rate of inflation so that borrowers can take out loans to cover their higher nominal costs without any real impact.

I agree with Don that the RBA have shown flexibility in not mechanically responding to external price shocks via a Taylor rule. It makes sense not to do so if these shocks are price increases that are not necessarily the start of an inflationary process.

Don argues that the danger with the RBA's 'softly, softly' policy is that inflation may emerge unchecked. I agree but see the problem here mainly as an issue of preventing wage increases to match cost-of-living increases that are exogenously imposed on us. Its the reason I* worry about Labor's political debts to the trade union movement. RBA policy itseklf seems to me quite sound.

1 comment:

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