Working Papers

Business Spectator Column

This week’s Business Spectator column.  If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list.  Email info at institutional-economics dot com.

posted on 21 June 2008 by skirchner in Economics, Financial Markets

(4) Comments | Permalink | Main

| More


Instead of holding the RBA responsible for inflation outcomes, responsibility is left with the government, which is expected to bail out monetary policy with a contractionary fiscal policy.
This is your constant refrain, Stephen, and you have certainly convinced me over the last 12 months that fiscal policy settings should be orientated towards the supply side of the economy and monetary policy left to handle the demand side. But even stated this baldly, the punters (or their fourth estate representatives) seem to have no problem with trading off lower taxes or higher spending for lower interest rates. Perhaps they don’t appreciate the relative magnitudes involved, but there appears to be a deep suspicion in the community of the value of tax cuts, notwithstanding that none have been reversed in recent years.

Posted by .(JavaScript must be enabled to view this email address)  on  06/24  at  02:49 PM

With so many commentators implying a direct trade-off between tax cuts and interest rates, it is not surprising that opinion polls framed the same way yield the results they do. 

I think it shows how dangerous it is not to hold the central bank explicitly accountable for inflation outcomes.  Responsibility gets shifted and other areas of public policy get distorted by a mistaken view of the inflation process.

Posted by skirchner  on  06/25  at  10:52 AM

The risk is that tighter credit conditions are readily absorbed by the increase in national income implied by a rising terms of trade, exerting only a moderate restraining influence on domestic demand.

Yeah well, I don’t know that the average “punter” is feeling this fabulous surge in national income you keep telling us about.  I’m not, that’s for certain!

Sure, they might benefit through income tax cuts, but that’s been more than offset by interest rate hikes, rising petrol and food prices ... and you know what, crunching domestic demand with yet more interest rate hikes will do SFA to reduce petrol prices.

Somehow I don’t think “inflation targeting” will survive the third great oil shock.

Posted by .(JavaScript must be enabled to view this email address)  on  06/27  at  10:52 AM

A couple of days ago, Craig James from Comsec put out some research saying that average earners who didn’t buy a home within the last 3 years were better off than when they did. This was due to wage rises and tax cuts outweighing increases in interest, petrol prices and other living costs. As reported in News Limited:

According to his analysis, a person on the average wage who took out an average housing loan in July 2002 would be in front by more than $425 a month, even allowing for increased costs.

An average wage-earner who bought into the real estate market four or five years ago would be more than $235 a month better off, while those who took out an average mortgage three years ago would be more than $50 ahead each month.

Posted by .(JavaScript must be enabled to view this email address)  on  06/27  at  11:06 AM

Post a Comment

Commenting is not available in this channel entry.

Follow insteconomics on Twitter