I have an op-ed in today’s Australian making the obvious comparison between the Asian Century White Paper and the 1989 Garnaut report. As I note in the op-ed, Garnaut’s most significant recommendation, the abolition of protection by the beginning of the 21st century, remains unrealised.
If the Garnaut recommendations could not be fully implemented in the reform era of the 1990s, it would seem unlikely that our contemporary political culture will make much progress in implementing the few substantive recommendations contained in the ACWP.
The ACWP will join the Henry review and the Rudd defence white paper as monuments to a failed process for public policy development and implementation.
An excellent op-ed by Doug Irwin on why US monetary policy is too tight:
The Divisia M3 and M4 figures for the US money supply, calculated by the Center for Financial Stability, show that the money supply is no higher today than in early 2008. For all the fretting about the Fed’s accommodative policy, the money supply has barely increased and is way off its previous trend. This represents a very tight policy compared to Friedman’s rule that growth in the money supply should be limited to a constant percentage. The lack of growth in the money supply is an important reason why US inflation and inflationary expectations remain under control. The Federal Reserve Bank of Cleveland’s latest market-based estimate of the 10-year expected inflation rate is 1.32 per cent.
‘Restructuring Prudential Bank Regulation in the Light of the GFC’ is the topic of this year’s free Warren Hogan Memorial Lecture to be given by Professor Charles W. Calomiris, Henry Kaufman Professor of Financial Institutions at Columbia Business School, a Professor at Columbia’s School of International and Public Affairs, and a Research Associate of the National Bureau of Economic Research.
Charles is one of the most interesting economists working in this important area of public policy. You can register to attend the lecture by following the above link.
Does Glenn Stevens know something Ben Bernanke does not? Matt Yglesias seems to think so:
if it’s true that Australia has recession-proofed itself through sound monetary policy, there are lessons that larger countries could be learning here. Heck, we could even be hiring some Australian central bankers to ply their trade in England, Japan, the United States, or wherever.
It is of course very implausible that being Australian in itself makes one a better central banker or the RBA has hit upon a secret formula for conducting monetary policy unknown to the rest of the world (not least because Australian central bankers mostly trained in North America). It is equally implausible that foreign central banks are incapable of observing and learning from the Australian experience.
Nor is that experience as good as Matt suggests. Australia went into the financial crisis with an inflation rate of 5%. In the absence of a severe global economic downturn, the RBA would have been forced to engineer a local one to have much hope of bringing inflation back down to the 2-3% target range. I argued back in August 2008 that monetary policy had been too easy in previous years. The subsequent financial crisis does not change that judgement in any way if you accept that it was an event that could not be forecast.
Glenn Stevens and Ben Bernanke both assumed their respective roles in 2006. Had they swapped roles, would monetary policy and macroeconomic outcomes have been any different in Australia or the US? I think not.
Jessica Irvine has rounded-up another Shadow RBA Board, including yours truly. Like the overlapping ANU Shadow Board, the News Ltd version makes normative rather than positive predictions, ie, what the RBA ‘should’ do rather than what it ‘will’ do.
This distinction probably isn’t very meaningful if the starting point for each month’s normative forecast is the existing cash rate. If the starting point re-sets every month, the Shadow rate track cannot deviate far enough or long enough from the actual rate to be economically significant. A Shadow Board needs to take its previous decisions as the starting point and develop an independent interest rate path. Even then, the difference between the Shadow and actual rate tracks may not amount to very much.
The US Shadow Open Market Committee and the UK’s Shadow Monetary Policy Committee were established specifically to critique current policy from a monetarist perspective, as well as advocating reform of existing monetary institutions. This has not prevented significant differences of opinion on these bodies. For example, the Shadow MPC includes supporters and opponents of QE for the UK. As I have argued here previously, QE is an entirely orthodox monetarist policy prescription. It represents no more than a change in operating instrument and QE in itself does not indicate whether policy is easy or tight. Monetary conditions could still be too tight even in the presence of large scale outright bond purchases by the central bank if money demand is strong enough.
We were also asked where we would like to see the official cash rate in 12 months time. My expectation is 100 bp lower than the current rate, but I do not think this will be a particularly easy monetary policy stance. There is a good case to be made that that the world equilibrium real interest rate and potential output have declined as a result of the bad public policy decisions taken globally during and after the financial crisis and now reflected in record low bond yields. How much of this is cyclical and how much becomes permanent depends on where public policy goes from here.
Monetary policy will need to reflect this, but will not do much to address what are ultimately supply-side problems.