Its easy enough to understand the treasurer’s criticism of the RBA in political terms. But the inflation target that is good for the central bank as an institution is not so good for the economy.
The RBA is a giant blame-shifting exercise, designed to deflect responsibility for “firms pricing decisions” onto workers and consumers - i.e. us. So, we pay for firms pricing decisions, then we pay again to “slay the inflation dragon”. It’s a scam. Governments initially thought it would be a good blame-shifting strategy for themselves, and gladly supported reserves’ “independence”, but that seems to be biting them on the arse now.
It's funny how we have an independent body to oversee interest rates but not to oversee education, health, the environment, justice, tax, etc. I'd say those I've mentioned (and some I haven't) are far more important for society than interest rates. Put Gabriel Zucman in charge of tax, Pasi Sahlberg in charge of education, and get pollies out of the way.
JQ: "a large proportion of the macroeconomics profession, arguably a majority, believes that a 4 per cent target would be optimal." Hum. Are these economists assuming that investors and entrepreneurs do not suffer from money illusion and will take the same real decisions regardless of the general rate of inflation? It is at least possible that this is not so. For example, they could interpret a shift from a 2% to a 4% target as implying a lower commitment to any inflation target, and hence a riskier financial environment generally, which will affect their decisions. 2% may well have been the wrong hill to die on, and 4% would have been the better choice. That does not mean that moving from 2% to 4% now is a free lunch.
The ECB now says that its 2% inflation target is symmetric. That was not always so, and symmetry today results fro a hard-fought struggle with powerful German fundies like Wolfgang Schäuble who treat any inflation at all as threatening a rerun of 1923, and for a long time succeeded in keeping 2% as an upper bound for the eurozone.
Duh! Each central bank should target inflation oat the level it judges appropriate for the expected shocks and degree of price stickiness so as maximize long term growth. Of course for extraordinary shocks like COVOI, temporary over-target inflation is appropriate.
It looks to me iike 2% PCE is pretty good for the US, but maybe 4% is right for Australia.
John, How can monetary and fiscal policy ever be conducted independently, without government overview and responsibility? How can a central bank ever be independent of government?
As you allude to but effectively sidestep, the RBA does not unilaterally set the target inflation range. It is done so in agreement with the government. The government of the day has the power to move to adjust it upwards if it had the policy cojones rather than attacking the RBA for fulfilling its mandate
The government also expects the public to fall for the three card trick of mechanically adjusting prices as a way to tackle inflation on the basis that rising prices cause inflation rather than being an effect of inflation (too much money chasing too few goods and services). The government keeps fuelling the demand side of the equation and then act surprised and blames the RBA
A government raising the target range would require repudiating the agreement on the framework for monetary policy and overriding the governor under the power mentioned in the opening para. It can be done, but it would be a drastic step (much more radical than, say, rewriting the Stage 3 tax cuts), not something that can be done in the ordinary course of policy adjustment.
I wouldn't favour going about things that way, but, as the article indicates, I support an end to the strong central bank indepenence we've had since the 1990s. That's the kind of thing a party that aspired to three-term government ought to have been thinking about
Then surely, if it is unable or unwilling to adjust the targeted range, then it is senseless to pursue a fiscal policy that cuts across the explicit monetary policy goals.
I think there is a strong argument that both the RBA and the government have needlessly prolonged the pain. The former by not acting faster and more aggressively hiking rates to levels seen in other countries and the latter by pursuing a fiscal policy that fuels demand in the name of political expediency.
Inflation is strangling the economy and doing it slowly and insidiously.
The RBA is a giant blame-shifting exercise, designed to deflect responsibility for “firms pricing decisions” onto workers and consumers - i.e. us. So, we pay for firms pricing decisions, then we pay again to “slay the inflation dragon”. It’s a scam. Governments initially thought it would be a good blame-shifting strategy for themselves, and gladly supported reserves’ “independence”, but that seems to be biting them on the arse now.
It's funny how we have an independent body to oversee interest rates but not to oversee education, health, the environment, justice, tax, etc. I'd say those I've mentioned (and some I haven't) are far more important for society than interest rates. Put Gabriel Zucman in charge of tax, Pasi Sahlberg in charge of education, and get pollies out of the way.
Oops! Careful with that itinerant apostrophe near the start. 'Chalmer's criticism' implies that the Treasurer is called Chalmer.
I've grown u'sed to apo'strophe's jus't abou't anywher'e'.
JQ: "a large proportion of the macroeconomics profession, arguably a majority, believes that a 4 per cent target would be optimal." Hum. Are these economists assuming that investors and entrepreneurs do not suffer from money illusion and will take the same real decisions regardless of the general rate of inflation? It is at least possible that this is not so. For example, they could interpret a shift from a 2% to a 4% target as implying a lower commitment to any inflation target, and hence a riskier financial environment generally, which will affect their decisions. 2% may well have been the wrong hill to die on, and 4% would have been the better choice. That does not mean that moving from 2% to 4% now is a free lunch.
The ECB now says that its 2% inflation target is symmetric. That was not always so, and symmetry today results fro a hard-fought struggle with powerful German fundies like Wolfgang Schäuble who treat any inflation at all as threatening a rerun of 1923, and for a long time succeeded in keeping 2% as an upper bound for the eurozone.
This is all about the zero lower bound on interest rates
Duh! Each central bank should target inflation oat the level it judges appropriate for the expected shocks and degree of price stickiness so as maximize long term growth. Of course for extraordinary shocks like COVOI, temporary over-target inflation is appropriate.
It looks to me iike 2% PCE is pretty good for the US, but maybe 4% is right for Australia.
John, How can monetary and fiscal policy ever be conducted independently, without government overview and responsibility? How can a central bank ever be independent of government?
As you allude to but effectively sidestep, the RBA does not unilaterally set the target inflation range. It is done so in agreement with the government. The government of the day has the power to move to adjust it upwards if it had the policy cojones rather than attacking the RBA for fulfilling its mandate
The government also expects the public to fall for the three card trick of mechanically adjusting prices as a way to tackle inflation on the basis that rising prices cause inflation rather than being an effect of inflation (too much money chasing too few goods and services). The government keeps fuelling the demand side of the equation and then act surprised and blames the RBA
A government raising the target range would require repudiating the agreement on the framework for monetary policy and overriding the governor under the power mentioned in the opening para. It can be done, but it would be a drastic step (much more radical than, say, rewriting the Stage 3 tax cuts), not something that can be done in the ordinary course of policy adjustment.
I wouldn't favour going about things that way, but, as the article indicates, I support an end to the strong central bank indepenence we've had since the 1990s. That's the kind of thing a party that aspired to three-term government ought to have been thinking about
Then surely, if it is unable or unwilling to adjust the targeted range, then it is senseless to pursue a fiscal policy that cuts across the explicit monetary policy goals.
I think there is a strong argument that both the RBA and the government have needlessly prolonged the pain. The former by not acting faster and more aggressively hiking rates to levels seen in other countries and the latter by pursuing a fiscal policy that fuels demand in the name of political expediency.
Inflation is strangling the economy and doing it slowly and insidiously.