Working Papers

What Does RBA Tightening Do to the Economy?

David Uren writes:

WHAT does a 0.25 per cent rate rise do to the economy?...

The Reserve Bank, like other central banks around the world, keeps its own estimate of the effect of its actions a secret.

In fact, the RBA’s published research on this question is reasonably explicit.  The latest iteration of the RBA’s policy simulation model estimates the long-run elasticity of the output gap with respect to a sustained increase in the real cash rate of 100 basis points at 1.0 (ie, real output 1% below potential output), with most of the impact seen within three years.  Significantly, the real cash rate enters the model as a deviation from an assumed neutral real cash rate of 3%.  As we have noted previously, the real cash rate has only recently moved significantly above neutral based on headline inflation.  To that extent, it is only recently that monetary policy has been exercising any restraint at all on the economy.  Much of the tightening in the nominal cash rate in recent years has simply been offset by rising inflation.

posted on 18 February 2008 by skirchner in Economics, Financial Markets

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What Does RBA Tightening Do to the Economy?

Well for one it destroys the export sector, but I think the RBA decided years ago Australia was destined to become a quarry for China.

By putting a rocket under the AUD with every rate hike the RBA is spurring demand for imports, which surely must negate much of what they’re trying to do.  The average punter might have a few less dollars in their pocket, but those dollars buy more and more Chinese widgets every week.

What’s the RBA’s plan?  Do they just keep pushing on a string until the economy cracks and then unwind as fast as possible?  Exporters not digging stuff out of the ground can’t survive for much longer.  When we go broke, we’re not coming back.

Surely you economist geniuses can come up with a better way of controlling inflation than this!

Posted by .(JavaScript must be enabled to view this email address)  on  02/20  at  11:53 AM

I would have thought that miners were in the same boat as any other exporter as far as the currency is concerned.

Posted by skirchner  on  02/20  at  02:50 PM

Except the miners are getting ever increasing prices for the resources they sell, which is more than keeping pace with the rising AUD.

I ask again, surely there is a better way of controlling inflation than this.

Posted by .(JavaScript must be enabled to view this email address)  on  02/20  at  03:30 PM

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