The Reserve Bank of Australia (RBA) is expected to lower its official cash rate from 2.75% to a record low of 2.5% at next week's monthly Board meeting. This will likely be an occasion for hand-wringing by some commentators, but the official cash rate by itself does not tell us much about the stance of monetary policy.
In the wake of the financial crisis, there has been a revival of the monetarist tradition in economics. Danske Bank economist Lars Christensen has dubbed this 'the new market monetarism' and a 'second monetarist counter-revolution.' The first monetarist counter-revolution was Milton Friedman's post-war revival of the quantity theory of money after decades of Keynesian-inspired neglect.
The new market monetarists argue that the combination of low inflation, low interest rates and subdued nominal gross domestic product (GDP) growth in many countries points to monetary policy being too tight rather than too easy. In other words, we need to judge monetary policy by macroeconomic outcomes, not official interest rates and other policy instruments.
The new market monetarists often point to Australia as an example of the successful stabilisation of nominal GDP, at least during the financial crisis.
More recently, however, nominal GDP has fallen well below its post-1993 trend. This is an indication that monetary policy has been too tight and explains why the Reserve Bank is lowering the cash rate to record lows, but historical comparisons of nominal interest rates are not very informative about the effective stance of monetary policy.
It will be interesting to see if the calling of an election date will change market expectations for a cut in interest rates next week. This will serve as a test of market perceptions of the Bank's independence.
The November 2007 rate hike demonstrated that the RBA would not let an election prevent it from doing its job. As Governor Glenn Stevens told the House Economics Committee in August 2007, 'if it's clear that something needs to be done, I don't know what explanation we can offer to the Australian public for not doing it. I don't think there's any case for the Reserve Bank board to cease doing its work in the month the election is going to be.'
Dr Stephen Kirchner is a Research Fellow at The Centre for Independent Studies and a member of News Ltd's Shadow RBA Board.
Home > Commentary > Opinion > The RBA and the second monetarist counter-revolution
The RBA and the second monetarist counter-revolution
In the wake of the financial crisis, there has been a revival of the monetarist tradition in economics. Danske Bank economist Lars Christensen has dubbed this 'the new market monetarism' and a 'second monetarist counter-revolution.' The first monetarist counter-revolution was Milton Friedman's post-war revival of the quantity theory of money after decades of Keynesian-inspired neglect.
The new market monetarists argue that the combination of low inflation, low interest rates and subdued nominal gross domestic product (GDP) growth in many countries points to monetary policy being too tight rather than too easy. In other words, we need to judge monetary policy by macroeconomic outcomes, not official interest rates and other policy instruments.
The new market monetarists often point to Australia as an example of the successful stabilisation of nominal GDP, at least during the financial crisis.
More recently, however, nominal GDP has fallen well below its post-1993 trend. This is an indication that monetary policy has been too tight and explains why the Reserve Bank is lowering the cash rate to record lows, but historical comparisons of nominal interest rates are not very informative about the effective stance of monetary policy.
It will be interesting to see if the calling of an election date will change market expectations for a cut in interest rates next week. This will serve as a test of market perceptions of the Bank's independence.
The November 2007 rate hike demonstrated that the RBA would not let an election prevent it from doing its job. As Governor Glenn Stevens told the House Economics Committee in August 2007, 'if it's clear that something needs to be done, I don't know what explanation we can offer to the Australian public for not doing it. I don't think there's any case for the Reserve Bank board to cease doing its work in the month the election is going to be.'
Dr Stephen Kirchner is a Research Fellow at The Centre for Independent Studies and a member of News Ltd's Shadow RBA Board.
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