The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Thursday, July 22, 2010

Bernie Fraser's battle over the RBA's dual goals

Under the 1959 Reserve Bank Act, the RBA was given twin goals of pursuing price stability and full employment. Professor Stephen Bell of the University of Queensland has charted how these goals formally changed in the 1990s with the employment objective clearly subordinated to the Bank’s inflation-targeting aspiration. What is arguably just as interesting is Bernie Fraser’s long-held opposition to these changes, which I think are an artifact of his career at Treasury. In what follows I quote directly from Bell’s history of the RBA, who in turn quotes from the key actors. Any emphasis added to the text is Bell’s, not mine (as a coincidental aside, both Bernie Fraser and John Phillips were in the audience during my Whitlam Institute speech):

“Where does this leave the second of the RBA’s dual goals, its obligation to pursue full employment? The message from the Bank was that the two could not be pursued simultaneously and that it would always fight inflation first…John Phillips, the Bank’s Deputy Governor…said “fighting inflation deserves top billing”, and now recalls that he always thought that the dual goals were “a bit of nonsense, to be honest.”

[Bernie] Fraser, however, rejected such calls and clearly believed in the dual goals…Fraser, just before his retirement from the Bank in 1996, argued dovishly that central banks, “should not be fixated solely with inflation, and we should not be loading the dice even more in that direction.”…

The prevailing view among central bankers and economists is that policy should pursue a medium to long term approach aimed at the unitary goal of low inflation, largely because the orthodoxy holds that in the medium to long term there is no trade-off between inflation and unemployment.

Fraser remained unconvinced. “The problem with this [orthodox] argument…is that the long term can be quite long indeed – five years or more.” Discussing the early 1990s, Fraser points not only to what he saw as his strategic use of the dual goal charter, but also to some tension within the Bank over policy:

“We should have moved faster to cut rates [in the early 1990s] yet there was a lot of resistance to moving even as fast as we did. This is where the dual goals become important because if we didn’t have them and were stuck with inflation as the sole objective…it would have been easier for those in the Bank who were uncomfortable moving as rapidly or as often as we did to lower interest rates to point to such a single objective. I was able all the time to counter with the argument that we were also legally charged with a concern about growth and employment. Without the dual goals, I don’t have any doubt at all…that it would have been very much harder to make those rate reductions…

Central bankers traditionally think in terms of fighting inflation above all else, and the RBA was no different. The various public comments during this period by Ian McFarlane, John Phillips and others bear this out. I did not grow up in this culture, and did not share it. This made for some on-going tensions within the Bank…”

The [1996] Statement, while reiterating the broad objectives of the Bank’s charter—including the dual goals—added: “Price stability is a crucial precondition for sustained growth in economic activity and employment.” This gave the inflation goal “top billing”, making the other goals conditional on it. Interestingly, reference to the Bank’s statutory goals—including full employment—was removed from the front matter of the Bank’s Annual Reports from that point on…

[Bernie] Fraser has reservations about the Statement, although he did not mention them publicly at the time:

“I wasn’t a fan of the Statement. It wasn’t something I would have pursued, for two main reasons. One, it gave more prominence to inflation that I thought the Charter justified and was appropriate – that issue of balance had been an ongoing theme in my term at the Bank. And the second thing was that the Statement was essentially an accord between the new Governor and the Treasurer; the Board wasn’t involved at all. I thought the Board was a significant part of the Bank’s policy process.”