Help me out here. RBA deputy says bank asked to do too much

By | septiembre 28, 2017
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The Reserve Bank is being asked to do far too much, its deputy governor Guy Debelle has told a conference in London. From the time it was granted independence in the mid-1990s, it came to be seen as «the only game in town» for economic management, a view that was reinforced as it was forced it to do more and more.

With the rare exception of the global financial crisis in 2008-2009, demand management became to be the sole responsibility of the Australian Reserve Bank and others like it, he told the conference on central bank independence. Government tax and spending decisions were «not much in the mix».

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«Given their mandate, as long as there was something that could be done to achieve the goals given to the central banks, however small the impact, then that something had to be done.»

When Dr Debelle prepared his PhD on central bank independence in the mid 1990s, government-controlled fiscal policy was seen as having an important role. Bank controlled interest rates were not «the only game in town».

«Central bank independence does not imply the complete delegation of demand management to the central bank,» Dr Debelle said. «The achievement of the output and inflation goals of the central bank is very much a function of the fiscal response too. There is a risk that the cult of central bank independence has placed excessive pressure on the central bank to always do more.»

A new threat to central bank independence came from the greater focus on the distributional consequences of adjusting interest rates.

«Monetary policy has always had distributional consequences. The primary transmission of monetary policy decisions is through two relative prices: the interest rate and the exchange rate. The interest rate is the intertemporal price of substitution, which has distributional consequences between savers and investors, as well as across generations, as indeed does inflation itself. The exchange rate has distributional consequences between the traded and non-traded sectors of the economy,» Dr Debelle said.

Unemployment had bigger distributional consequences, but attention was shifting to central banks because of low wage growth and the role of low interest rates in supporting high house prices.

Banks were also being asked to ensure financial stability, a goal that could at times conflict with economic management.

«The central bank should not be regarded as a font of all wisdom,» Dr Debelle said. «To do so risks comprising the independence in the areas that matter.»

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