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, October 7, 2010

What happens when the RBA lifts rates by 0.25%?

In this new paper, the central bank presents a range of interesting simulations. The chart below shows the RBA's model using actual Australian data between 1993 and 2007. It simulates the impact of a 25bps increase in the cash rate on output, inflation and the exchange rate. The authors find that this shock, "reduces the level of output by around 0.2 percentage points relative to baseline within two years, and lowers the quarterly inflation rate by around 0.02 percentage points after two years." What is surprising is how seemingly modest the effect is on inflation. What is also interesting is how long-lasting the influence is of an interest rate increase on output (up to 5yrs later) and the real exchange rate, which appreciates for up to 6yrs. Of course, it pays to remember that this is just a simulated estimation, that is heavily reliant on its assumptions.