Terry McCrann has today echoed my arguments about the asymmetry of the RBA's reaction function. Yesterday, I wrote for Business Spectator:
"A fourth factor at play here is my belief that the RBA has an ‘asymmetric value function’ vis-à-vis over- and under-shooting its 2-3 per cent inflation target (people have a similarly non-symmetric emotional response function in the pain and joy they attribute to losses and gains). This is a rarely appreciated insight.
I suspect the RBA would prefer to undershoot rather than overshoot, all other things being equal. This is because (a) the damage to its inflation-fighting credibility, and hence its ability to anchor long-term expectations, is much greater when it overshoots as opposed to undershoots, and (b) there is a lot of empirical evidence to suggest that the incidence of high inflation is more likely than deflation (precisely because central banks fail to do their jobs), and that it is harder for a central bank to cut inflation than it is to increase it."
Today, McCrann reiterated this specific point for News Limited today:
"While one can have a theoretical discussion about which is 'worse' - hiking in October and the data then moderating, or not hiking and things picking up - and conclude that the former is worse. Except neither the RBA's mandate nor its perspective is symmetrical. It's always 'worse' to not hike and 'things' - that's to say inflation - pick up."
He also has a jab at HSBC's new chief economist, Paul Bloxham, which, I think, is unnecessary. Paul certainly has unique insights into the RBA, which are likely to improve our understanding of how they might operate.
