Monday, February 27, 2012

Australian exceptionalism

The Governor of the Bank of Canada recently gave a speech on inflation targeting (via). It was a sensible enough speech except for one thing. (Well, perhaps more than one, but I will let Scott Sumner deal with that.)

What I am going to harp on is: no mention of Australia.

If you are going to discuss sensible monetary policy, it is past time when careful meditation on the Australian experience should be required. No recession since 1991 is a performance to ponder. But the point is much broader than that. Australia is an extremely successful public policy example. What we do works, and was working very well before the recent commodity price surges.

It is just that the success is particularly stark in monetary policy. The Reserve Bank of Australia's monetary policy target of an 2-3% average level of inflation over the business cycle has been extremely successful. So successful that for the Governor of the Bank of Canada to make no mention of it at all in a speech on inflation targeting is risible.

8 comments:

  1. Lorenzo: I tried to tackle the Canada, Australia, New Zealand question once. Never came to a really satisfactory conclusion though: http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/03/canada-australia-and-new-zealand.html

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    1. Nice post and discussion. NZ has been doing worse than Oz for quite some time now. It is a smaller and narrower economy with much sharper shifts in policy.

      That Oz has variable rate mortgages that folk cannot walk away from (except via bankruptcy) is probably both a stabilising factor and an effective monetary policy transmission mechanism. Especially as housing credit is about 60% of total credit.

      I agree that the fiscal stimulus was handed out quickly: but fiscal stimulus in a small open economy with a floating exchange rate--how effective was it likely to have been really?

      A technical point: the RBA does not target 2.5% inflation, it targets an average of 2-3% over the course of the building cycle. That is inflation targeting that works a lot like NGDP targeting, since the effect is to stabilise growth in Py.

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  2. Lorenzo: "..but fiscal stimulus in a small open economy with a floating exchange rate--how effective was it likely to have been really?"

    The small and open bits don't really matter. This is really just an application of the general point (the one Scott Sumner needs to keep repeating) that fiscal policy should be unnecessary if the central bank is doing its job right.

    "A technical point: the RBA does not target 2.5% inflation, it targets an average of 2-3% over the course of the [business] cycle."

    Hmm. I shall have to look a little more closely at that. The BoC says it seeks to bring inflation back to the 2% target "over the medium term", by which it means normally 18 months to 2 years.

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    1. My take is that by averaging over the business cycle, the effect is to stabilise growth in Py. If y weakens, the RBA pumps up P; if y surges, the RBA dampens down P. In other words, aiming for an average growth in P over the business cycle is NGDP targeting parading as inflation targeting.

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  3. By the way, I spent a very worthwhile hour or two perusing your blog last night. You write good stuff Lorenzo.

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  4. Lorenzo, I am getting quite tired with never-ending bitching and moaning about how fucked Australia is by other Australians. If it's not that Medicare is a disaster behave US healthcare is so superior, it is Finnish school students test results, and of course strident letters to The Guardian, sharing they 'just had to leave Australia, it was too, too, too racist you see, sweetie..

    But just now, I've got an off-topic question, the answer to which, will make my next post on this thread very on-topic: As an historian, how do you define an "historical turning point"? Are there any classic statements on 'what historians are talking about when they discuss 'turning point'. Not long, a paper I wrote were not received as well as I'd hoped. The clearest point the reviewer made was "you did not define 'turning point'."

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    1. Yes, the moaning is way over done. As I said in my previous post, land use and indigenous policy are done badly: for the rest, more people should be so lucky as to have what we have.

      For me, a historical turning point is when some major trend in events changes directions. It cannot be a "bump on the road", it must be something where we see quite different outcomes before and after: outcomes which are not simply a continuation of what came before.

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