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

implications.

     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: sophia.rodrigues@marketnews.com

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