MNI ANALYSIS: RBA's MARTIN Knows Cash Rate Story, Won't Tell

--RBA's Macro Model Helping Policymakers Shape Longer-Term Thinking

By Sophia Rodrigues

     SYDNEY (MNI) - If you know the Reserve Bank of Australia, it is likely you

also know its location: Martin Place in Sydney. But very few know the RBA's

connection with another Martin -- Macroeconomic Relationships for Targeting

Inflation, a full-system macroeconomic model designed by the central bank --

also, perhaps unsurprisingly, known as MARTIN. 

     MARTIN has the potential to tell us when the RBA's cash rate could reach

the neutral level and thus the timing of the first rate hike of the current

cycle. It is unlikely the RBA will publish its extended forecast horizon but the

quarterly Statement on Monetary Policy, due Friday, could reveal some of

MARTIN's work and possibly some insight into the period after June 2020 when the

forecasts end.

     Governor Philip Lowe hinted at additional details regarding upcoming policy

in his speech Tuesday when he said, "Those of you who are close readers of this

document will notice some changes in this issue, as we seek to make the report

more thematic."

     One of the most significant uses of the model is to extend forecasts and

analyze the outlook beyond the two-to-three year published forecast horizon. 

     If published, it will be the first time the RBA's forecasts will tell the

complete monetary policy story, although publication still seems unlikely.

     --MARTIN'S HISTORY

     The RBA developed the model in response to a review in late 2014 of its

forecasting, put together by Adrian Pagan, professor at the University of Sydney

and David Wilcox, a researcher at the Federal Reserve. 

     The review recommended the RBA develop and analyze 'full-system' or

'general equilibrium' models of the economy -- that is, models which account for

the simultaneous responses of a large number of key variables to unexpected

developments (or shocks). The review recommended supplementing the Bank's

existing models with one that incorporates its separate single equation

estimates for a range of key variables into a system of equations.

     MARTIN was developed in 2016 and has been in use since the middle of 2017.

     The program can be used for various purposes, including scenario-analysis,

to produce its own model-based forecasts, with and without imposing assumptions

and additional judgement, and to understand the staff forecasts.

     But one of its most noteworthy uses is to extend the horizon of the

forecast -- another of the review's key recommendations. 

     --MARTIN KNOWS

     The RBA could use this, at least for internal discussion, to map out a

plausible path that would take the macroeconomy back to full employment, keep

inflation within the target range, and return the cash rate to its neutral

level.

     Currently, the RBA's forecasts show inflation within the target band, but

the unemployment rate still above the current estimate of full employment and

the cash rate at least 200bps below the neutral rate.

     As the inflation forecast moves closer to the mid-point of the target band,

there is a lot of interest in when the RBA expects the neutral cash rate level

will be reached. That end point would determine when the starting point of the

next rate cycle would come.

     MARTIN knows the answers to all the above questions, but won't tell us --

not yet at least.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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