Aakash Kapoor: I am from Eltham College. How do you prioritise the economic goals other than inflation when considering changes in monetary policy stance?
Mr Stevens: This goes a little to the issues Mr Ciobo was raising earlier. We have a statutory goal of full employment [CJ: reference the 1959 Act, which from a practical policy perspective has been superseded by the post 1996 agreements with government prioritising the 2-3% inflation target], which is not defined in terms of numbers of unemployed, so there is an issue: we have to work out what that means numerically. There is also stable prices—we have to put a number on that too. Those two things can in a sense be in conflict over short periods, but in the long run they are not actually in conflict [CJ: Stevens is saying here that if the RBA focuses on inflation, and not growth or employment in the short-to-medium term (because they conflict), and delivers on its price stability objectives, employment and growth will be looked after in the long-run (ie, there is no long-run conflict)].
I would say that one of the main insights of macroeconomics in the period I have been following it is that the sustainable unemployment rate is ultimately determined by the set of systems in the labour market [CJ: Code for industrial relations and nothing to do with the RBA]. Monetary policy can make it go away from that for a while, but not permanently.
In the medium term and the long run, inflation is largely a monetary thing so provided our definition of full employment is consistent with what the real economy is telling us there is no inherent conflict between the two goals [CJ: A rather confusing way of addressing the question, frankly].
Where there can be temporary difficulties is where you get a so-called adverse supply shock that pushes inflation up and activity down, in some countries that is what is happening now, but that is difficult. [CJ: I think he is talking about situations like the floods, New Zealand and Japan] We have to take a reasonable and balanced path between the two when that occurs [CJ: That is, the RBA looks through these one-off shocks even though they do hit the headline CPI for a time]. I that is as good as I can do on that.
