On BillMitchell’s blog this week, he states that “the RBA governor should get back tofulfilling the legal charter of the RBA – to ensure there is full employmentand price stability.” See: More political interference from the central bank – oh but itsindependent!, Monday, August 24, 2020, http://bilbo.economicoutlook.net/blog/?p=45656
The charter was written in 1959 when the RBA was established. The persons who drafted the charter should have known then that they were imposing on the RBA a combination of policy objectives that would be impossible to fulfill. In 1952 the Dutch economist and econometrician, Jan Tinbergen, showed that “agovernment with multiple policy objectives, such as full employment and pricestability, must be able to draw on multiple economic policytools—say, monetary policy andfiscal policy—to achieve the desired results.” See Britannica: https://www.britannica.com/biography/Jan-Tinbergen
“Tinbergen emphasized that achieving the desired values of acertain number of targets requires the policy maker to control an equal numberof instruments.” See Wikipedia: https://en.wikipedia.org/wiki/Jan_Tinbergen
Sixty-two years after the RBA was established there is now aclear division of responsibilities. The RBA is responsible for monetary policy,and the government is responsible for fiscal policy.
The RBA has one policy instrument, the Target Cash InterestRate. It cannot achieve the two policy targets of full employment and price stability with just this one instrument. Since 1996 the RBA’s focus has been on ensuring price stability. See: “Statement on the conduct of MonetaryPolicy” August 14, 1996, https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-1-14081996.html
In addition to the Target Cash Interest Rate, Open MarketOperations (OMOs) are also used by the RBA to implement its monetary policy. OMOs are used to ensure that the Cash Rate converges to the Target Rate, and to better align the yield curve. OMOs would be ineffective in reducing unemployment. Both employment and unemployment are determined in the labour market where fiscal policy is more appropriate and more effective.
Roger Tonkin
Former Lecturer in Econometrics, Macquarie University(Retired)
August25, 2020
