RBA Assistant Governor Christopher Kent has just delivered a speech at the ANU on the transmission of monetary policy.
It’s a continuation of the recent theme that RBA Governor Stevens has been running which highlights that the RBA believes interest rate policy is still effective at supporting demand.
It was a somewhat wonkish look at how and why monetary policy supports demand in the Australian economy. At its heart though was a question around why, given that “net interest payments of households are now more responsive to changes in interest rates than they were a decade or more ago” monetary policy hasn’t given the economy more oomph.
Kent discussed the way in which monetary policy works, the so-called transmission mechanism, is evolving through time. He said that the “transmission mechanism may have changed in some respects, and this could help to explain lower-than-expected growth of consumption and debt of late.”
In the face of the big fall in interest rates it seems like it is the significant economic headwinds holding back the Australian economy at the moment.
Monetary policy is clearly working to support demand, although it is working against some strong headwinds. These include the significant decline in mining investment, fiscal consolidation at state and federal levels and the exchange rate, which continues to offer less assistance than would normally be expected in achieving balanced growth in the economy.
The good news, Kent said, is that “monetary policy is working.” But he also highlighted that changed consumer preferences are making it hard for the RBA to truly judge the economic outlook.
“To know more about this, it would be helpful to better understand the behaviours of different types of households using household-level data. To use a botanical analogy, to know more about a plant, it’s helpful to observe how its different types of cells work,” Kent said.
Indeed, some behavioural economic studies on Australian household and consumer behaviour would go a long way to squaring the circle.