Monetary policy is no longer effective


And even then, we started off on the wrong foot by trying to control the cash flow, which didn’t work. We only shifted the focus to controlling interest rates in the early 1980s. Inflation targeting came in the mid-1990s, and it was not until 1997 that the reserve’s independence from the elected government was formalized.

It would be nice to imagine that we are gradually moving towards the one right way to run the economy, but that would be a delusion. History teaches us that we are constantly changing the way we do things to better suit the particular problems of the time. In fact, by the late 1940s, everyone agreed on this was a macro economy that needed to be managed.

The two main ‘arms’ of macro-management (we abandoned the third arm, exchange rate policy, in 1983 when maintaining a fixed exchange rate became impossible) have different strengths and weaknesses.

The great advantage of monetary policy is that the economists who direct it can ignore the election cycle. In addition, it can be adjusted quickly and easily. But acknowledging that, it is otherwise inferior to fiscal policy. It can’t be targeted to specific regions or industries, and it takes longer to do what you need — with the notable exception of property prices.

Our current problem of sudden, high inflation – caused by supply chain disruptions and overstimulated demand – shows what a blunt and clumsy tool monetary policy is.

Our current problem of sudden, high inflation – caused by supply chain disruptions and overstimulated demand – shows what a blunt and clumsy tool monetary policy is.Recognition:Arsine Houspian

Our current problem of sudden, high inflation – caused by disruptions on the supply side (production) of the economy, exacerbated by an overstimulated demand side (spending) – clearly demonstrates the bluntness, crudeness and unfairness of monetary policy.

This raises two questions. we had to use both Weapons of politics to respond to the pandemic? And how much of our current excess demand can be attributed to monetary policy?

Economists defend what, in hindsight, was clearly too much stimulus by saying they didn’t know how much economic disruption the pandemic would cause, medics initially led them to believe it could be a lot worse than it turned out to be, and However, it is better to do too much than too little.

But none of that says we had to overdo it on either cask. With the official rate already down to 0.75 percent before the virus hit, it was clear the Reserve was almost out of ammunition. I imagined that it could do little more and leave fiscal policy to do all the heavy lifting. Like it was.


But no, the reserve rushed to the rescue as if they were the only knight who could find a horse. It cut interest rates to near zero, offered banks cheap credit, and soon joined the larger central banks in using created money to buy government bonds to lower longer-term interest rates.

At the time, I asked myself whether this was just institutional protection. The Reserve’s job was to be the prime demand manager, and it wasn’t going to sit out the biggest crisis in ages just because it ran out of ammunition. we will find some we can turn into balls.

In retrospect, I suspect that the Reserve’s determination not to be expelled from the party greatly increased our new problem and the pain they inflict on us to solve the problem. If you get to the heart of the matter, one of the most important “channels” through which monetary policy affects demand is by influencing the cost of housing.

The Reserve is right when they say interest rates are not that high primary Reason for high house prices, but because monetary policy is such a one-trick pony, all it can do is ignore all the pain it causes by letting prices soar when it lowers rates and fall when she lifts them.

Between the two arms, they boosted the housing economy, only to now slam on the brakes. They built surprisingly few additional homes, but pushed new home prices up 20 percent and lifted inflation by 1.8 percentage points from 6.1 percent.

According to Oxford Professor Simon Wren-Lewis, the old consensus among academics that monetary policy should take the lead in controlling demand has been replaced by one where interest rates are the preferred tool to fight inflation – as they are now – but fiscal policy should be the Be the main weapon to fight recessions. Or lockdowns.

The point is, had we followed that rule during the pandemic, we’d have a much smaller inflation problem now. Something for the investigation to consider. And whether resorting to “unconventional measures” was ever a wise idea.

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Brian Lowry

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