Australia’s slowing economy: how should the government and Reserve Bank respond?
Brendan Coates, Emma Dawson and I go head to head in the Guardian Australia over how the government and RBA should respond to an emerging downturn
posted on 21 September 2019 by skirchner in Economics, Fiscal Policy, Monetary Policy
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Australian Business Economists Event on QE
Australian Business Economists hosted a Lunchtime Briefing on QE in Australia? What would it look like? with Ms Lyn Cobley, Chief Executive, Westpac Insitutional Bank, Dr Stephen Grenville AO, Non-resident Fellow, Lowy Institute, and myself.
Ross Gittins summarises the event in his write-up for the SMH.
The text of my remarks can be found here.
posted on 26 August 2019 by skirchner in Economics, Monetary Policy
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Lessons from quantitative easing in the United States: A guide for Australian policymakers
I have a new report out with the United States Studies Centre on Lessons from Quantitative Easing in the United States: A Guide for Australian Policymakers. It argues that the RBA could implement a smaller but more effective program of asset purchases by learning from the US Fed’s missteps.
There is a write up by John Kehoe in the AFR. There is also an op-ed version in The Conversation.
In this piece in The Mandarin, I explain why Tim Wilson MP and others are mistaken in their criticisms of QE. Opposing QE when it is needed will lead to more of the interventions Tim otherwise opposes.
Bloomberg’s Michael Heath also quotes from my report.
posted on 18 June 2019 by skirchner in Economics, Monetary Policy
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US Fed Shows the RBA is Not About to ‘Run out of Ammunition’
I have a piece in the USSC’s 45th on how the Federal Reserve shows that the RBA cannot ‘run out of ammunition’ and why the RBA is singularly responsible for managing aggregate demand.
posted on 06 June 2019 by skirchner in Monetary Policy
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New government should put Phil Lowe on the hook for inflation
I have an article in The Mandarin on why the next government should re-negotiate the current agreement between the Treasurer and Reserve Bank Governor on the conduct of monetary policy.
posted on 09 May 2019 by skirchner in Monetary Policy
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Questions over RBA chief Philip Lowe road to inflation target
Ahead of this week’s CPI release, David Uren quotes me and Nic Gruen on the costs of trading off the inflation target against financial stability concerns.
posted on 29 October 2018 by skirchner in Monetary Policy
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Money too tight to mention: The Reserve Bank of Australia’s financial stability mandate and low inflation
I have a new publication in the journal Economic Analysis and Policy on the evolution of the RBA’s financial stability mandate and its relationship to the inflation target. Copyright restrictions prevent posting full text online, but DM if interested.
Nic Gruen has a similar take here.
posted on 12 October 2018 by skirchner in Monetary Policy
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Don’t Sacrifice the Inflation Target on the Altar of Financial Stability
I have an op-ed at The Conversation on what happens when the RBA sacrifices its inflation target on the altar of financial stability.
posted on 16 May 2018 by skirchner in Monetary Policy
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Donald Trump has a chance to shape US monetary policy for years
I have an op-ed in today’s AFR on how Obama’s neglect gives Trump the chance to own the leadership of the Federal Reserve Board. Full text below the fold (may differ slightly from published version).
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posted on 14 February 2018 by skirchner in Economics, Financial Markets, Monetary Policy
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Wayne Swan on Monetary Offset and the GFC
Former Treasurer Wayne Swan is releasing some of his briefing notes from the GFC ahead of the launch of his upcoming memoir, The Good Fight. The first instalment from a meeting at the Prime Minister’s residence with the Prime Minister, Treasury Secretary and other senior officials on 4 August 2008 is remarkable for its acknowledgement of monetary offset. Indeed, the notes could just as easily have been written by Scott Sumner:
There are three broad considerations the Government would need to keep in mind in taking a decision to engage in discretionary [fiscal] action:
• The Reserve Bank through its control over interest rates, determines the overall level of aggregate demand in the economy, and the Bank would likely take account of any fiscal stimulus in its monetary decisions – that is, more spending would keep interest rates higher than otherwise…
The bottom line is that in the event of a shallow downturn, discretionary [fiscal] action may not achieve any noticeable outcomes in terms of growth and unemployment, but would leave rates higher, erode the [budget] surplus and put at risk the Government’s fiscal credibility.
These costs of course need to be weighed against the potential political costs of being seen to do nothing…
Needless to say, the ‘political costs’ argument won in the end, with the first discretionary fiscal stimulus announced in October 2008.
posted on 12 August 2014 by skirchner in Economics, Fiscal Policy, Monetary Policy
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Is John Edwards a Ricardian?
John Edwards’ ‘Beyond the Boom’ is a welcome follow-up to his 2006 ‘Quiet Boom’, which I reviewed at the time in conjunction with Ian Macfarlane’s Boyer Lectures.
I agree with the argument that economic reform should not be sold on the basis of a faux crisis or economic failure narrative. If proposed reforms are worth doing they are worth doing regardless of where we sit in relation to the business cycle or the budget outlook.
John notes that households saved the Howard government’s tax cuts and that household saving would have been lower in their absence. This is an important observation, because it demonstrates the private saving offset to changes in public saving. Possibly to spare his readers the jargon, John didn’t mention this as an example of Ricardian equivalence, but it is clearly relevant here. I made much the same argument at the time.
It is perhaps worth noting that John was rather more sympathetic to tax cuts in ‘Quiet Boom,’ where he says that:
It may well be worthwhile to reduce the top marginal income tax rate, or to encourage more workforce participation by older Australians or to increase the incentives to move from social security support to paid employment.
Those arguments remain valid, regardless of the state of the budget. While balancing the budget over time is important, this should not come at the cost of reducing incentives for labour market participation.
John also notes that during the financial crisis, the increase in private sector saving more than offset the decrease in public sector saving from the fiscal stimulus. He doesn’t mention that this is at odds with the dominant narrative around the stimulus, which is that it worked because we ‘went early, went large and went households.’ If the stimulus worked, John’s analysis implies that it was not through household consumption spending. I would like to have seen John spell out these implications in more detail (my take is here).
John maintains we should limit the current account deficit to 3.3% of GDP to contain growth in external liabilities. This is close to the average since 1960 and so is certainly achievable based on historical experience. However, in ‘Quiet Boom’ John shows how conditioning macro policy on a view about the appropriate size of the current account deficit got us into a lot of trouble. Tim Geithner’s attempt to get the G20 to sign up to a 4% of GDP limit on current account imbalances was similarly mistaken in my view. We cannot know in advance the appropriate rates of saving and investment, from which it follows that the appropriate current account deficit is also unknown.
John maintains that the government has a revenue rather than a spending problem, but this is necessarily a joint problem. The normative issue is to define what government should be doing and raise revenue accordingly. In that sense, the expenditure side is analytically prior to the revenue side, regardless of what is driving changes in the budget balance over any given period. The test both revenue and expenditure measures need to pass is whether they improve incentives to work, save and invest. Higher average tax rates do not pass that test and would be at odds with the aims of the tax reform process and raising labour force participation. Balancing the budget is important, but should not come at the expense of microeconomic incentives. Balancing the budget and stabilising net debt as a share of GDP will be a somewhat hollow achievement if it comes at the expense of a smaller economy that yields less revenue for government in absolute terms.
John is spot on in arguing that Australia’s economic future lies in integration with Asia through trade in services. I would add that there are even larger gains to be had through increased trade in capital and labour. Regional free trade agreements will be important in defining the parameters of our engagement and deserve close attention from policymakers. The G20 would do well to focus on the successful conclusion of regional and multilateral trade deals.
Alex Tabarrok says the Reserve Bank deserves a lot of credit, but I do not think we can attribute Australia’s relative economic outperformance to the conduct of monetary policy. Australia adopted inflation targeting along with the rest of the world. Australia’s senior central bankers largely trained in north America and think much like Ben Bernanke. It cannot be said Australia followed a different intellectual approach or that we know something foreign central bankers do not.
At the onset of the crisis, CPI inflation was running at an annual rate of 5%, nominal GDP at 11% and inflation expectations were coming unhinged. In the absence of a global downturn, the RBA would probably have needed to engineer a severe domestic slowdown to bring inflation back to target. In that sense, the downturn in the world economy did the RBA a favour. Monetary policy is neutral in the long-run, so I don’t think we can give the central bank too much credit for a 23 year expansion.
posted on 03 July 2014 by skirchner in Economics, Monetary Policy
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ECB to Adopt QE in H2 2014
I have an op-ed in Business Spectator arguing that the ECB will likely resort to QE in the second half of this year. This will be a vindication of the long-standing criticisms of ECB monetary policy made by the new market monetarists. Inflation outcomes, nominal GDP and the euro exchange rate are all consistent with monetary policy having been too tight rather than too easy. The emerging divergence between ECB/BoJ and Fed monetary policy should set the stage for broad-based USD outperformance.
posted on 11 April 2014 by skirchner in Economics, Financial Markets, Monetary Policy
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De-Risking the RBA
I had an op-ed in the AFR over the break on the federal government’s injection of funds into the RBA’s Reserve Fund. The article notes that the public policy issue is not the subtraction from the budget bottom line from the injection, but whether the benefits of holding foreign exchange reserves are worth the risk of potential valuation losses and forgone income on higher yielding domestic assets. Foreign exchange reserves are not necessary for the effective conduct of monetary and exchange rate policy in Australia. An alternative policy approach is to hold smaller reserves. Full text below the fold (may differ slightly from published AFR text).
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posted on 13 January 2014 by skirchner in Economics, Financial Markets, Monetary Policy
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The 30th Anniversary of the Floating of the Australian Dollar
I have an op-ed in today’s AFR on the occasion of the 30th anniversary of the decision to float the Australian dollar. This year also marks the 20th anniversary of the adoption of implicit inflation targeting by the Reserve Bank, although a formal inflation target was not adopted until August 1996. As I note in the op-ed, the combination of these two macroeconomic institutions fundamentally changed the role of fiscal policy in the economy. Yet much of our macroeconomic policy debate remains stuck in the pre-float era. Full text below the fold (may differ somewhat from edited AFR text).
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posted on 09 December 2013 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy
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Credit Controls Won’t Fix Housing
I have an op-ed in the AFR making the case against macro-prudential regulation in relation to lending for housing. Text below the fold (may differ slightly from published version).
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posted on 03 October 2013 by skirchner in Economics, House Prices, Monetary Policy
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