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--Debelle Doesn't Favor Raising Inflation Target, Price Level Targeting
By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of Australia Deputy Governor Guy Debelle
isn't in favour of price level targeting, raising the inflation target or
nominal income targeting but said it is important to question if the current
inflation framework remains the right one or whether it could be enhanced.
     At the same time, Debelle believes the inflation-targeting framework in
Australia has made a material contribution to the economy and the welfare and
prosperity of the people.
     Debelle made the comments in a speech published on Monday but delivered on
April 12 at a conference held at the RBA.
     "The inflation target has made a material contribution to the very
satisfactory macroeconomic outcomes that the Australian economy has enjoyed over
the past 25 years. Inflation has been consistent with target. The unemployment
rate on average has been lower and less variable than in earlier periods,"
Debelle said.
     "This has gone a long way to fulfilling the mandate of the Reserve Bank of
contributing to the welfare and prosperity of the Australian people," he said.
     Still, "it is important to continue to question whether the framework
remains the right framework going forward and whether there are enhancements
that could be made to it," he added.
     Debelle discussed some of the current debates around the current
configuration of the inflation target and whether is the most appropriate
     About price level targeting, Debelle said that in a world where there are
costs to disinflation and deflation, the likely small gains from the full
predictability of the price level that comes with a price level target are not
likely to offset the costs of occasional disinflations following positive price
level shocks. There could also be communication and operational challenges when
deciding how fast the price level should return to its target level.
     "While the argument at the moment is that a price level target allows the
central bank to let the economy grow more strongly after a period of
unexpectedly low inflation, again I do not think that practically this will
deliver better outcomes than a flexible inflation target," he said.
     According to Debelle, in thinking about the need for a higher inflation
target because it might reduce the risk of hitting the zero lower bound, a
question needs to be asked whether what we have seen is the realization of a
tail even in the historical distribution of interest rates.
     "If it is a tail event, and the world has just been unlucky enough to have
experienced a realisation of that tail event, then there would not obviously be
a need to raise the inflation target," he said,
     Debelle also suggested that an inflation target above 2% to 3% will
materially enter decision-making, and it is important that an inflation target
should be such where it doesn't materially enter into economic decision-making.
     Debelle said central banks could encounter significant communication
challenges with nominal income targeting because it is more difficult to explain
to people than inflation. 
     Secondly, as a very practical matter, nominal income is subject to quite
substantial revisions, which poses difficulties both operationally and again in
communicating with the public, he said.
     On the role of financial stability in an inflation-targeting framework,
Debelle said over a long time horizon, the inflation target and financial
stability goals are aligned but over a shorter time horizon, it could be a large
--MNI Sydney Bureau; tel: +61 2-9716-5467; email:
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]

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