Working Papers

Do Australians Make Better Central Bankers?

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.

posted on 04 October 2012 by skirchner in Economics, Monetary Policy

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There a two major policy differences between the Fed and the RBA

(1) The RBA has an average target over the business cycle.
(2) The RBA has had an explicit target since 1993.

Which means the RBA has credibility on both inflation and spending. This made a difference when the GFC etc rolled around.

Posted by Lorenzo  on  10/04  at  08:20 PM

I would say the RBA inflation target was implicit before 1996, while the Fed has an implicit 2% target.

Bernanke has been shifting the Fed to explicit inflation targeting.

Posted by skirchner  on  10/05  at  10:14 AM

The RBA has probably been assisted by the large proportion of mortgage-holders with variable rate loans, as well as our pre-crisis distance from the zero bound. Scott Sumner has said on many occasions that the Fed would have probably loosened faster and more aggressively if they had started with a higher FF rate. Hopefully if and when we are in a similar position, our RBA would have learned from the North Atlantic experience.

Posted by .(JavaScript must be enabled to view this email address)  on  10/06  at  02:21 PM

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