It’s not the job of a reserve bank to worry about home prices

Again, people point out the potential danger of low interest rates in Australia.

This week’s so-called “market economist” poll Rating agency Fitch Only 12% of respondents support the current stance of the Reserve Bank of Australia, and 68% say monetary policy is too loose, or interest rates are too low.

In Australia, there are natural concerns about home prices. Already a serious housing affordable problem seems to be exacerbated by a combination of low interest rates, the light at the end of the COVID-19 tunnel, and irrational enthusiasm.

However, as mentioned earlier, the housing market should not be the focus of reserve banks when making monetary policy decisions. Central banks need to focus on maintaining inflation targeting and credibility.

Comments from Vice President Guy Debel in recent weeks and the actions of banks over the past two years have made it clear that banks understand it.

Affordability of homes is an urgent issue, but reform of tax incentives such as negative gearing and relaxation of zoning restrictions is a good way to deal with it.

read more: Vital Signs: The RBA wants to reduce unemployment, and even soaring home prices have nothing to prevent.

Inflation controversy in the United States

That said, the outlook for inflation over the next few years remains an important consideration for central banks around the world.

In the United States, there has been lively debate in recent months as to whether the Biden administration’s huge $ 1.9 trillion spending plan will cause serious changes in inflation.

Two of the best economists of his generation, Larry Summers and Olivier Blanchard, Intellectual leader Of such concern.

On the other side of the debate are great brains such as Treasury Secretary Janet Yellen, Nobel laureate Paul Krugman, and Federal Reserve Board Chairman Jay Powell.

read more: Why high inflation returns cannot be ruled out

What should we learn from this discussion in Australia?

The Australian Government has phased out the biggest pandemic measures, JobKeeper and JobSeeker. Its federal budget incorporated the use of fiscal policy (expenditure), but was modest compared to the Biden administration’s plans. Therefore, Australia does not face the same pressing considerations as the United States.

Nonetheless, there are important lessons to be learned from the US inflation controversy.

Can inflation be fine-tuned?

The big intellectual debate that has caused inflation concerns in the United States is that it is unwise to think that inflation can be fine-tuned.

Inflation can be raised or lowered by careful adjustment of monetary policy, according to the 30-year practice of central banks around the world.

Indeed, extraordinary monetary policy is needed during extraordinary times, and therefore, since the financial crisis of 2008, negative interest rates have gone from negative interest rates to negative interest rates and quantitative easing, but central banks have been pushing inflation. We maintain the belief that we can maintain a “habitable zone”.

That zone is about 2-3% inflation maintained by central banks that set monetary policy independently of the government.

The experience since the central bank’s independence movement took root confirms this in many ways. Like.

Attention Inflation Story

Japan is a typical lesson of a country where prices are expected to fall rather than rise, and people have fought to save rather than spend and avoid a deflationary spiral that meets their expectations.

What about inflation too much, not too little?

For decades this has not been a problem in developed countries with competent and independent central banks.

But in countries like Zimbabwe and Venezuela, banknote printing is causing hyperinflation. Similar policies in France in the 1980s and Germany in the 1990s were, of course, on a much smaller scale. But caused an inflationary explosion just in time.

The real question is: can a country like Australia be like Zimbabwe or Venezuela?

read more: Causes of hyperinflation in Venezuela: A rare mix of public ineligibility and private sector

The short and unpleasant answer is “yes”.

The more subtle answer is “Yes-not likely”. But that doesn’t mean we should act as if it couldn’t happen.

Aim for the habitable zone

Economy, market and expectations can be balanced in both good and bad ways.

Inflation is in the Goldilocks zone, people believe it will stay there, and central banks can implement monetary policy like a scalpel.

But there is also the bad equilibrium that people lose confidence in inflation that stays in the Goldilocks zone. A dramatic rise in interest rates is needed to stop the inflation explosion. Monetary policy changes from female to chainsaw.

Paul Volcker, chairman of the Federal Reserve Board from 1979 to 1987, used the chainsaw to curb widespread inflation in the early 1980s, but there was a lot of pain. Accompanied.

Those currently concerned about inflation, such as Mr. Summers and Mr. Blanchard, are concerned about moving to a bad equilibrium, which fundamentally requires painful policy movements to improve.

Those who are not too worried basically think that they can maintain the current good equilibrium. Some people find it dangerous to talk about it and can lead to changes in inflation expectations.

Whatever happens in the United States, we in Australia should watch carefully and not be complacent with our ability to fine-tune the economy.

Author: Richard Holden-Professor of Economics, UNSW

It’s not the job of a reserve bank to worry about home prices

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