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RBA's Debelle: MonPol Wealth Impact Larger than Other Channels

By Sophia Rodrigues
     SYDNEY (MNI) - The wealth channel of monetary policy instruments may be
having a larger impact than other channels, and raises questions on not just the
legitimacy of the instrument independence of the central bank but also whether
it should have complete independence to use whatever instruments it chooses to
pursue financial stability goals, Reserve Bank of Australia Deputy Governor Guy
Debelle said Thursday.
     In a speech delivered to the Bank of England conference in London, Debelle
talked about the need to focus on what the important elements of financial
stability are and how central banks should go about achieving them.
     The topic of his speech is "Central Bank Indepdence in Retrospect."
     Debelle said a new threat to central bank independence comes from the
greater focus currently on the distributional consequences of monetary policy. 
     By this he means the substitution that takes place between savers and
investors as well as across generations when interest rates are moved. Monetary
policy decisions also affect the exchange rate, which has a distributional
impact on the traded and non-traded sectors of the economy and also cross-border
     But these distributional effects may be threatening central bank
independence currently because of lower level of nominal growth, particularly
wage growth.  The wealth channel may also be playing a disproportionately larger
role than in the past because the primary transmission channel of unconventional
monetary policy is through asset prices, including house prices.
     "The distributional impact of the wealth channel may well be larger than
that of other channels of monetary policy transmission. If the distributional
impact of monetary policy channels is larger now than it was in the past, this
can compromise the legitimacy of instrument independence," Debelle said.
     Debelle discussed this further with respect to financial stability, asking
whether the central bank should have "complete independence to pursue its goal
of financial stability with whatever instruments it so chooses, including when
the distributional implications of some of those instruments are much starker?"
     It is therefore important to focus the debate on both the goal of financial
stability and the instruments because they are much less clearly defined at
present, he said.
     "While the combination of goal dependence and instrument independence in
terms of monetary policy has stood the test of time, the equivalence in terms of
financial stability is more an open question," he said.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email:
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