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Instrument Insufficiency and Economic Stabilisation
Author(s) -
Bowden Roger J.
Publication year - 2006
Publication title -
australian economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.308
H-Index - 29
eISSN - 1467-8462
pISSN - 0004-9018
DOI - 10.1111/j.1467-8462.2006.00417.x
Subject(s) - economics , inflation (cosmology) , interest rate , monetary policy , currency , monetary economics , exchange rate , aggregate demand , asset (computer security) , cash , real interest rate , economic policy , finance , physics , computer security , theoretical physics , computer science
Recently concerns have been raised in New Zealand about the effectiveness of monetary policy in controlling inflation while avoiding damage to the economy from high exchange rates. This review examines the basis for concern and identifies the problem as a failure in the primary instrument, namely the Reserve Bank's official cash rate, to adequately impact further along the term structure curve, which has become the more sensitive area for aggregate demand. Direct control over expenditure is therefore weak, and too much leeway is left to the housing and other asset markets to sustain demand in the economy. Globalisation of credit availability and financial technology have helped to blunt the policy instrument in this respect, shifting the adjustment burden on to the exchange rate. Deft management of interest and currency expectations can help, but the problem may require closer coordination and cooperation between monetary and fiscal policy, restoring a stabilisation role for the latter.