A short presentation on the unique aspects of inflation-targeting by the Reserve Bank of Australia. Compared with other inflation-targeting Central Banks, the RBA is to have low independence from the Government. The strong focus on credibility, transparency and flexibility allows the RBA to smooth volatility in the real economy and to occasionally target asset prices.

1. Monetary Policy According to the Reserve Bank of Australia Jonathon Flegg and MiekeKlanker

2. Presentation Outline Inflation-Targeting Success Inflation-Targeting Pioneer Inflation-Targeting “Nutter”?

3. RBA’s Statutory Charter Reserve Bank Act 1959

4. RBA’s Institutional Evolution

5. Politicisation of Interest Rates

7. three ex officio members – the Governor (who is Chairman), the Deputy Governor (who is Deputy Chairman) and the Secretary to the Treasury

8. six non-executive members.

9. All positions are appointed by the Treasurer.

11. Low Personnel Independence

12. High Financial Independence

13. Low Policy Independence

14. High Instrument Independence

15. Sousa (2002) assessed the personal, political and economic/financial independence of central banks, placing RBA second last.

17. Inflation-Targeting Framework Measure of inflation Target band and horizon Policy timeline Policy rate “This formulation allows for the natural short run variation in underlying inflation over the cycle while preserving a clearly identifiable benchmark performance over time” (RBA, 2011).

18. CPI and Flexibility The CPI target can be understood as a central tendency . The trimmed-mean rate of inflation down-weights the impact of items in a given period if their price changes are ‘unrepresentative’ in the period in question. June 2006: banana prices increased by around 400 per cent. Flexibility puts greater onus on communication and credibility.

19. Inflation Performance “If, some years hence, we can look back and observe that the average rate of inflation has a ‘2’ in front of the decimal place, that will be regarded as a success” (Debelle, 1995). 1. Hitting the inflation target 2. Reducing inflation volatility 3. Anchoring inflation expectations

20. Inflation Performance

21. Proverbial Free Lunch in the Real Economy? Unemployment GDP Growth “… the average level of inflation and its variability have decreased substantially. However, this has not come at the expense of slower or more variable output growth, indeed, unemployment is lower and output variability has decreased” (Lim, 2009).

22. Presentation Outline Inflation-Targeting Success Inflation-Targeting Pioneer Inflation-Targeting “Nutter”?

23. Is RBA a Strict Inflation-Targeter? “I regard it as a compliment to be called an inflation nutter.” Mervyn King (1997) as Governor of the Bank of England

24. Credibility, Transparency and Flexibility These three words sum up the institutional design of RBA’s inflation-targeting regime Anchoring inflation expectations Short-term “room”

25. So What are RBA’s Secondary Targets? “well-anchored inflation expectations may afford the central bank more short-term flexibility to respond to economic disturbances that affect output and employment” – Bernanke (2004).

26. Working the Short-Term Phillips Curve As RBA has successfully anchored inflation expectations, it has also exploited short-term gains in output and employment. The top-right-hand quadrant shows examples of when, despite high inflation, the RBA decided to target a positive unemployment gap with a rate decrease. In the short-run, RBA is attempting to capture the welfare gains of a reduction in output and employment volatility, rather than using a ‘surprise’ to generate higher output or employment.

28. Capital gains exemptions (1999)Throughout 2002-04 the RBA ‘chased the bubble’ by tightening interest rates, in contrast to every other developed economy, and most large developing economies.

29. Plus the ‘Open Mouth Operations’ To persist with a strongly expansionary policy setting … could fuel other imbalances such as the current overheating in the housing market, potentially jeopardising the economy’s continued expansion (RBA Media Release – 8 May 2002). … the run-up in housing prices and associated expansion in housing related debt were a source of concern for most of the past year, given the potential of such a process to remain disconnected from fundamentals and develop into a significant imbalance over time. (SMP – February 2003, p 3) … a case might be made, on rare occasions, to adopt a policy of ‘least regret’ so far as asset prices are concerned, if financial and macroeconomic stability were thought to be at risk (Stevens 2003).

30. Takeaways from the RBA

31. Questions/Comments? Jonathon Flegg: j.c.flegg@nus.edu.sg Mieke Klanker: mieke.klanker@sciences-po.org

33. Bernanke, B. (2004). “Central Bank Talk and Monetary Policy”. Retrieved from: http://www.federalreserve.gov/boarddocs/speeches/2004/ 200410072/default.htm .

34. Bloxham, P., Kent, C. and Robson, M. (2010). “Asset Prices, Credit Growth, and Monetary and Other Policies: An Australian Case Study”. Reserve Bank of Australia Research Discussion Paper 2010-06.

35. Cukierman, A. (1992). Central Bank Strategies, Credibility, and Independence: Theory and Evidence. Cambridge: MIT Press.

37. Lim, G. C. (2009). “Inflation Targeting”. Australian Financial Review 42(1): 110–18.

38. Reserve Bank of Australia. (2011). “About the Reserve Bank of Australia: Our Role”. Retrieved from: http://www.rba.gov.au/about-rba/our-role.html .

39. Sousa, P. (2002). Central Bank Independence and Democratic Accountability. Portucalense University, Mimeo.

40. Stevens, G. (2003). “Inflation Targeting: A Decade of Australian Experience”. Address to the South Australian Centre for Economic Studies ‘April 2003 Economic Briefing’, Adelaide, 10 April.