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."

Sunday, August 1, 2010

How do we marry price stability (monetary policy) with financial stability?

This is a great post from the IMF's blog. It canvasses the conflicts between monetary policy--ie, price stability--and our newly sharpened appreciation for "financial stability", noting that seeking the former can undermine the latter:

"So how can we align price and financial stability? One answer is to simply add financial stability as a separate objective for monetary policy. But this marriage of convenience could easily end in divorce—it would cause conflict, and both objectives could be missed, making a serious dent in the central bank’s credibility."

Importantly, the IMF argues that financial stability should really be the focus of "prudential policy". In Australia, that means financial stability should be the domain of APRA, not the RBA. That's interesting, because currently the financial stability mandate rests with the RBA. This post also wades into the asset-price targeting debate, and concludes that monetary policy can do a little bit to "lean against" credit and asset price momentum, but, critically, not too much. It's a fine balance. And this broadly reflects my own position. Here is the summary:

" I think we can derive the following broad conclusions:

•Prudential policies must be the first defense against credit-fueled asset booms. This is a powerful tool, and it doesn’t depend on whether the boom is driven by capital inflows or funded domestically.

•Monetary policy can help by non-mechanistically “leaning” against the build-up of financial imbalances, such as credit booms which finance asset bubbles. Of course, it should not lean too far—everything must stay consistent with price stability.

•In general, the response depends on circumstances. It’s less about mechanics and more about judgment, making use of all available information.

•By paying closer attention to financial stability in the pursuit of price stability over the medium term, monetary policy can become more symmetric during the cycle. This means more “leaning” in good times and the need for “less cleaning” in bad times once bubbles explode."