MNI BRIEF: Ex RBA Board Member Pagan Backs Cash Rate Floor

Former Reserve Bank of Australia board member Adrian Pagan has suggested setting a floor under nominal interest rates and the possible introduction of a target unemployment rate, in a submission to the RBA review. Pagan, who also led a 2015 review of the RBA's forecasting, was critical of the impact of near zero nominal interest rates on pushing up house prices, saying the RBA should "well keep away" from negative real interest rates. "Consequently, we should have some qualification made to any monetary agreement to the effect that nominal cash rates would not go below some level. I suggest 1%- 1.5%," he wrote.

"If the economy needs very large stimulus it should come from fiscal policy rather than pushing towards a lower interest rate bound with all the issues that will flow from that."

He also wrote that there "may be a case" for setting a target unemployment rate that "reflects the thinking of the Australian government and public about what is achievable." He also suggested that a separate monetary policy committee should be formed that focuses on interest rate deliberations.