Australia as Poster Child for the New Market Monetarism? (March Quarter Edition)
The national accounts were out yesterday, so time to update our graph of the (log) level of nominal GDP relative to its low inflation period trend. The Australian economy still sits 4% below the NGDP level stabilisation benchmark suggested by the new market monetarists, implying that monetary policy has been too tight:
The new market monetarists argue Australia was a poster child for NGDP stabilisation during the financial crisis, but I interpret things differently. Prior to the onset of the financial crisis, inflation was out of control (CPI inflation running at 5%) and nominal GDP growth was running in the double-digits. The financial crisis saved the RBA from having to induce a domestic recession to bring inflation under control. The RBA was most successful when international conditions were doing the work for them.
Lest this look like the luxury of hindsight, I was arguing much the same thing in August 2008.
Time to Dump Australia’s Anti-Dumping System: My New Paper with CIS
The Centre for Independent Studies has released my new paper Time to Dump Australia’s Anti-Dumping System. The paper notes the multi-decade failure to have public interest considerations incorporated in the administration of anti-dumping in Australia:
The Productivity Commission argued that ‘the highest priority for reform of Australia’s anti-dumping system is to introduce consideration of the broader public interest.’ The commission (under its previous names) has been arguing for this position since at least 1985. This multi-decade failure to incorporate public interest considerations into Australian anti-dumping and countervailing law suggests the system is unlikely ever to serve the public rather than private producer interests. The government’s rejection of the commission’s proposal for even a bounded public interest test ensures that Australia’s anti-dumping system will continue to serve the interests of a small number of Australian producers at the expense of other Australian businesses and consumers. The ‘reforms’ implemented by the federal government and supported by the federal opposition set the stage for creeping protectionism via anti-dumping actions that will impose growing costs on the Australian economy. This is part of a broader trend on the part of the federal government to extend assistance to Australian industry at the expense of consumers and taxpayers, and to stand in the way of a structural adjustment in the Australian economy.
The public interest will be best served by repealing the anti-dumping and countervailing provisions of Australian law and dismantling the associated bureaucracy within Customs. This was a recommendation of the 1989 Garnaut review that remains un-implemented nearly a quarter of a century later. Doing so would send a powerful signal to Australian industry that it must adapt to the structural changes in the world and domestic economies rather than going cap-in-hand to the federal government for assistance at the expense of consumers and taxpayers.
Australia can also set a powerful example on the world stage as a country that prospers because it has abandoned recourse to these protectionist measures.
The Future Fund’s creator, former Treasurer Peter Costello, does not have much faith in the ability of sovereign wealth funds to promote fiscal responsibility:
Now I put aside $60 billion in the Future Fund. People say “oh well you could have put aside 70 or $80 billion or something like that.” But I make this point. If we’d put aside more they’d probably just have borrowed more.
Foreign Exchange Market Intervention a Risk to Taxpayers
I have an op-ed in the Business Spectator arguing that foreign exchange market intervention is a risk to taxpayers who would be better served if the RBA matched its foreign currency assets and liabilities. I also debunk the notion that Australia is a victim of a ‘currency war’:
It has been argued that Australia is somehow a victim of a ‘currency war’ being waged between foreign central banks engaged in quantitative easing. Yet there is nothing unusual about the effects of quantitative easing on exchange rates.
Quantitative easing is simply a change in the operating instrument of the central bank, from a price variable (the official interest rate) to a quantity variable (base money).
In itself, quantitative easing tell us nothing about whether central bank policy is easy or tight. Low inflation and low interest rates in countries like Japan and the United States imply policy settings are if anything too tight, not too easy.
The exchange rate is just one of the channels through which a change in monetary policy is transmitted to the rest of the economy and quantitative easing does not fundamentally alter this transmission mechanism.
In previous decades, Australians worried about a low exchange rate and capital flight. In the current international environment, foreign capital inflows are an affirmation of our relatively sound economic fundamentals and not a bad problem to have.
I have taken over as the editor of Policy, journal of the Centre for Independent Studies. I am currently finalising the Autumn (southern hemisphere!) issue, but I am looking for contributions to the Winter issue with a deadline of 30 April.
Please keep Policy in mind as an outlet for your ideas. Policy reaches an influential audience and we are planning a number of initiatives to extend its reach and build the subscriber base.
We are open to feature articles, interviews, review essays and book reviews covering a wide range of policy issues and ideas from any disciplinary perspective. Note that contributions are subject to a refereeing process.
Feel free to get in touch to discuss any ideas you may have. Contributor deadlines for future issues are as follows:
Winter 2013: 30 April
Spring 2013: 30 July
Summer 2013/14: 30 October
A model of inward foreign direct investment for Australia is estimated. Foreign direct investment is found to be positively related to economic and productivity growth and negatively related to foreign portfolio investment, trade openness, the exchange rate and the foreign real interest rate. Foreign direct investment is found to be a substitute for both portfolio investment and trade in goods and services. The exchange rate and the US bond rate affect foreign direct investment through the relative attractiveness of domestic assets. Actual foreign direct investment outperforms a model-derived forecast in recent years, consistent with the liberalisation of foreign investment screening rules following the Australia–US Free Trade Agreement.
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
‘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.