MNI RBA Debelle: Infl Frame Helped Econ But Debate Still Imp

--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

framework.

     PRICE LEVEL TARGETING

     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.

     APPROPRIATE LEVEL OF INFLATION TARGET

     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.

     NOMINAL INCOME TARGETING

     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.

     ROLE OF FINANCIAL STABILITY

     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

challenge.

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

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