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Money too tight to mention: The Reserve Bank of Australia’s financial stability mandate and low inflation

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  • Kirchner, Stephen

Abstract

When Philip Lowe became Governor of the Reserve Bank of Australia in 2016, the Australian government agreed to a change in the Statement on the Conduct of Monetary Policy that inverted the relationship between the Reserve Bank’s price and financial stability mandates. Whereas a previous agreement had made financial stability explicitly subordinate to the price stability objective, the 2016 agreement specifically allowed for temporary deviations from the inflation target in pursuit of financial stability. I argue this change led the Reserve Bank to overly condition monetary policy on apprehended financial stability risks at the expense of achieving the inflation target, explaining a prolonged undershoot of the central tendency of the RBA’s 2%–3% inflation target range. The RBA otherwise characterises financial stability risks as low, implying little benefit from conditioning monetary policy on those risks compared to the costs of undershooting the inflation target. Below target inflation may itself undermine the financial stability objective. I recommend the next federal government revert to the wording of the 2010 Statement on the Conduct of Monetary Policy in describing the relationship between price and financial stability, as well as other measures to re-prioritise the inflation target.

Suggested Citation

  • Kirchner, Stephen, 2018. "Money too tight to mention: The Reserve Bank of Australia’s financial stability mandate and low inflation," Economic Analysis and Policy, Elsevier, vol. 60(C), pages 141-149.
    • Handle: RePEc:eee:ecanpo:v:60:y:2018:i:c:p:141-149
    DOI: 10.1016/j.eap.2018.09.014
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    References listed on IDEAS

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    Cited by:

    1. policy, Work stream on macroprudential & Policy, Monetary & Stability, Financial & Albertazzi, Ugo & Martin, Alberto & Assouan, Emmanuelle & Tristani, Oreste & Galati, Gabriele & Vlassopoulos, Thomas , 2023. "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area," Occasional Paper Series 272, European Central Bank.
    2. policy, Work stream on macroprudential & Albertazzi, Ugo & Martin, Alberto & Assouan, Emmanuelle & Tristani, Oreste & Galati, Gabriele & Vlassopoulos, Thomas, 2021. "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area," Occasional Paper Series 272, European Central Bank.

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    More about this item

    Keywords

    Monetary policy; Reserve Bank of Australia; Inflation; Financial stability;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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