In World Economy News 10/08/2016
Reserve Bank of Australia Governor Glenn Stevens said monetary policy alone cannot dial up growth, but it should be accompanied by fiscal policy.
“I have serious reservations about the extent of reliance on monetary policy around the world,” Stevens said in his final speech as governor on Wednesday.
“It isn’t that the central banks were wrong to do what they could, it is that what they could do was not enough, and never could be enough, fully to restore demand after a period of recession associated with a very substantial debt build-up,” Stevens said.
There needs to be realism about how much monetary policy can do, including pushing inflation up quickly.
Supporting inflation targeting, Stevens said that it has operated with requisite degree of flexibility. The framework bends with the circumstances, while retaining its essential integrity.
In the period of very low inflation, the bank may adjust monetary policy to lift inflation back to the target in short order, Stevens observed. However, this could create more problems than they solve.
He also noted the necessity to close the gap in the government’s recurrent budget, as rising debt that is not held against assets will start to be a material problem.
The path back to budget balance is turning out to be a very long one, he noted. Many difficult choices will need to be made along the path of budgetary adjustment.
Concluding his speech, Stevens said over the past decade and in a very volatile world, Australia has achieved the inflation target and avoided a major economic downturn.
It has seen remarkably little variability in real economic activity in the face of enormous shocks, experienced a fairly low average rate of unemployment, and had a stable financial system as well.
Source: RTT News
