RBA Did Not Go Far or Fast Enough

I have an op-ed in today’s Age, arguing that:

TURNING points in the official interest rate cycle are usually accompanied by claims that monetary policy has gone too far. But if there is any criticism to be made of the Reserve Bank’s most recent tightening cycle, it is that it did not tighten far or fast enough.

The August Statement on Monetary Policy released yesterday contained this observation:

the increase in CPI inflation in Australia is not due only to energy and food prices. Measuring ‘core’ inflation in a broadly similar manner to that used in other industrial countries, inflation excluding food and energy and financial services has increased from around 2 per cent to 3 per cent over the past few years in Australia. This calculation indicates that inflation pressures here have been more broadly based over the past couple of years than in other countries. Indeed, inflation in Australia is now higher than the median of comparable countries in nearly all of the 11 major CPI categories.

posted on 12 August 2008 by skirchner in Economics, Financial Markets

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New Role

I have a taken up a new position as a Research Fellow with the Centre for Independent Studies. I will still be using the blog to highlight the work I’m doing at CIS, so stay tuned. The weekly newsletter has been discontinued. The Business Spectator column will also be discontinued in its current format.

Part of my role is to involve other economists in the work of the Centre. If you are interested in contributing to the CIS research program, I would encourage you to get in touch (skirchner-at-cis.org.au). CIS has several formats for publishing economic and other research, ranging from short journal articles to Occasional Papers and Policy Monographs.

The easiest way to stay across the work of CIS is to become a member, which entitles you to receive all CIS publications by mail, including my output. Donations over and above the annual membership rate are tax deductible. You will be helping to ensure that some of the ideas developed on this blog over the years are given increased prominence.

posted on 05 August 2008 by skirchner in Economics

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Business Spectator Column

This week’s Business Spectator column.

posted on 26 July 2008 by skirchner in Economics, Financial Markets

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Business Spectator Column

This week’s Business Spectator column.

posted on 19 July 2008 by skirchner in Economics, Financial Markets

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Business Spectator Column

This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.

posted on 12 July 2008 by skirchner in Economics, Financial Markets

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More of the Same for the RBA Board

The new Labor government’s changes to the appointments process for the RBA Board are seen by the RBA and Treasury as preserving the status quo:

Documents obtained by The Australian under Freedom of Information laws show Reserve Bank governor Glenn Stevens and Treasury secretary Ken Henry began discussing Labor’s promised register of nominees in early December last year.

Mr Stevens had some names to suggest early on, as did Dr Henry, but did not regard Labor’s pledge as a bid for radical change.

“I have already had a question on whether this process will result in more economists on the board, to which my answer was that as far as I knew, the idea wasn’t to change the nature of the board, simply to ensure that the best people could be approached,” Mr Stevens told Dr Henry on December 12.

In reply, Dr Henry agreed “the intention is not to change the composition of the board”.

As I predicted here, the new arrangements serve primarily to entrench bureaucratic influence over monetary policy.

In another triumph for transparency and accountability, the names on the register have been suppressed:

The names on the register were deleted in the documents released by Treasury, with the decision-maker ruling their publication would undermine the appointment process.

The documents concede the argument I make in the linked article above, that the composition of the RBA Board ‘was unusual by international standards,’ but maintain that the existing arrangements ensure that Board members ‘operate in, and are seen as representatives of the broader national interest, rather than representing a specific section of the Australian economy.’

Unfortunately, the RBA also argues that the only way in which external Board members can be expected to represent the national rather than their own sectional interests is if the contributions of individual members are suppressed from the minutes of Board meetings. In any other context, the idea that a conflict of interest can be resolved through increased secrecy would be considered absurd. The RBA’s defence of the existing Board arrangements shows they are incompatible with modern demands for central bank transparency and accountability. It says a lot about the RBA that most of our insights into the official rationale for the current governance arrangements come via Freedom of Information requests.

posted on 09 July 2008 by skirchner in Economics, Financial Markets

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Business Spectator Column

posted on 05 July 2008 by skirchner in Economics, Financial Markets

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Alan Wood Tributes

George Megalogenis and Stuart Rintoul round-up tributes to The Australian’s retiring economics editor, Alan Wood:

It is said around the pointy end of the media, and in the halls of the economic bureaucracy, that Wood called every recession correctly in his 45-year career. But Wood admits he can’t remember if that boast is strictly true.

posted on 03 July 2008 by skirchner in Economics

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The Ever Receding Doomsday Cult Trade

For those of you who have given up on a US recession in 2008, Intrade has rolled out a contract for a US recession in 2009. A 2008 recession is still priced at around a 30% chance, with the contracts for individual quarters still implying a better than even chance that growth will be positive for every quarter this year.

Intrade has also rolled out recession contracts for Japan, Germany, the UK, France, Italy and Ireland for 2008 and 2009. Like the contracts for the US, the bids and offers suggest little real conviction behind the idea of a global recession.

Intrade is also running contracts on who will be the next leader of Australia’s federal parliamentary Liberal Party.

posted on 02 July 2008 by skirchner in Economics, Financial Markets

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Alan Wood Retires

The Australian’s economics editor, Alan Wood, retires:

After more than 40 federal budgets and 50 state ones, I have decided enough is enough. The last straw was when Wayne Swan put a coloured cover on this year’s Budget Paper No1. What next, his photograph? So I am retiring, and this is my final column as The Australian’s economics editor. However, after a break I will be contributing a weekly opinion page piece. See you then.

posted on 02 July 2008 by skirchner in Economics

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Business Spectator Column

posted on 28 June 2008 by skirchner in Economics, Financial Markets

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Business Spectator Column

posted on 21 June 2008 by skirchner in Economics, Financial Markets

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Chicago School Unwelcome at Chicago

University of Chicago academics oppose naming a new research centre after Milton Friedman:

In a letter to U. of C. President Robert Zimmer, 101 professors—about 8 percent of the university’s full-time faculty—said they feared that having a center named after the conservative, free-market economist could “reinforce among the public a perception that the university’s faculty lacks intellectual and ideological diversity.”

“It is a right-wing think tank being put in place,” said Bruce Lincoln, a professor of the history of religions and one of the faculty members who met with the administration Tuesday. “The long-term consequences will be very severe. This will be a flagship entity and it will attract a lot of money and a lot of attention, and I think work at the university and the university’s reputation will take a serious rightward turn to the detriment of all.”

...faculty critics are concerned that it will be one-sided, attracting scholars and donors who share a point of view.

The opposition probably tells us more about the lack of diversity and the ideological biases at the rest of the university than at the new research centre.

posted on 19 June 2008 by skirchner in Economics

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Stevens versus Bernanke: What the WSJ Won’t Tell You

Another one of those laughable WSJ editorial comments:

The biggest problem in emerging economies isn’t “the credit crunch about which we hear so much . . . but inflation.” So said Glenn Stevens, Australia’s central bank governor, to a business crowd in Melbourne Friday. It’s too bad U.S. Federal Reserve Chairman Ben Bernanke wasn’t in the audience.

Unlike his Fed peer, Mr. Stevens has ruthlessly resisted inflationary pressures.

Never mind that Australia has a much more serious inflation problem than the US on most measures, none of which the WSJ sees fit to mention. The US core CPI was running at 2.4% y/y in March compared 3.5% y/y for the comparable Australian measure. If Stevens has taken a tougher rhetorical stance on inflation than Bernanke (which is by no means obvious), it is because Australia has a much more serious inflation problem. The WSJ cites Australia’s nominal cash rate as a measure of the tightness of monetary policy, but this only highlights the inflation premium built into Australian interest rates. The real cash rate, which is the more appropriate measure of the stance of monetary policy, is only around 3%.

The more significant difference between the Fed and the RBA, however, is that the Fed considers inflation too high at 2.4%. In Australia, 2.5% is the mid-point of the target range. The RBA doesn’t even aspire to beat the Fed on inflation and has the inflation outcomes to show for it.

posted on 16 June 2008 by skirchner in Economics, Financial Markets

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