Working Papers

Once Were Inflation Warriors

Terry McCrann on former inflation hawks Hewson and Jonson:

OK, you drop the 2-3 target and replace it with . . . what exactly?

Hewson’s 3-4 per cent? Maybe 4-6 per cent? Perhaps a return to a 1970s: hey babe, whatever feels good? Or a vague, contradictory and confusing ‘check list’?

Whatever, the clear implication is that we should accept a “little more inflation”.

Apart from the fact that the RBA is already explicitly doing that - something most of the critics either don’t understand, or wilfully ignore.


posted on 29 April 2008 by skirchner in Economics, Financial Markets

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Have you seen this:


The “natural rate of interest” is the theoretical interest rate at which monetary policy does not artificially boost the economy, nor hold it back. It is also the rate at which money is neutral on inflation. There have been many attempts at measuring this. Some economists look at real interest rates. Others use the Taylor Rule, which includes a target rate for inflation and real growth.

And while these methods are helpful, they rely on estimates. I devised a much simpler system back in 1993, based on actual economic data, that has proven extremely useful. It predicted the sharp increase in long-term interest rates in 1994; it also predicted the recession of 2001, the deflation of the early 2000s, and the inflation of recent years.

This model shows that a neutral federal funds rate should be roughly equal to nominal GDP growth. Nominal GDP growth (real growth plus inflation) measures total spending in the economy, or to put it another way, it reflects the average growth rate for all companies in the economy.

Posted by .(JavaScript must be enabled to view this email address)  on  05/02  at  06:43 PM

Yes, I saw that one.  Australia’s nominal GDP growth in 2007 was 7.4%, so the official cash rate is now pretty close to that at 7.25%.

Posted by skirchner  on  05/03  at  01:48 PM

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