1. If I made a submission to the RBA Review, which I won’t, it would start with the following observation: the objectives and to a lesser extent the framework are second order issues when compared to culture and institutional design.
2. While the Review should be forward looking, we should require a high threshold of evidence and expected benefits to make radical changes now. Much of the concern about policy has arguably been about the failure to achieve objectives, not the objectives themselves.
3. To the extent we think the RBA has failed to achieve their mandates stems from problems of institutional design and culture in my view. Sorting this out would largely resolve issues relating to the objectives and framework.
4. That is not to say improvements can’t be made. A priority should be to sharpen the understanding of the objectives in the Statement on the Conduct of Monetary Policy. Two basic concerns here.
5. First, recourse to the third `welfare’ mandate needs to be tightly circumscribed to prohibit advancing unmeasurable and therefore unaccountable goals being pursued in its name. This is not an argument against financial stability concerns; just that they be measurable.
6. Second, persistent low neutral interest rate environments justify a more aggressive focus on the full employment mandate. We should tolerate more inflation variation to guarantee full employment if the ZLB on nominal rates is a recurrent problem.
7. We should of course provide institutional flexibility about the interpretation of price stability and full employment. If later we adduce clear evidence in support of the superiority of price level or nominal income targeting, we should be able to make changes.
8. When talking about objectives, a far more pressing concern is to provide clarity about the objectives of fiscal and macro-prudential policy. For example, theory and evidence makes clear inflation targets cannot be met under certain choices of debt management policy.
9. As Treasury seeks to entrench medium and long-term principles for fiscal sustainability, they should be cognizant of their implications for fiscal backing of the public debt, and therefore inflation policy.
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