Econ Talks from Australia

Governor of the Reserve Bank of Australia from 1996 to September 2006, Ian Macfarlane gave recently a series of lectures on how the developed world economies have struggled to maintain macroeconomic stability over the course of the 20th century. Here are links to the audio of the 6 part series (from Radio National);

Lecture 1: The Golden Age
Lecture 2: From Golden Age to Stagflation
Lecture 3: Reform and Deregulation
Lecture 4: The Recession of 1990 and its Legacy
Lecture 5: The Long Expansion
Lecture 6: Challenges for the Future

Final comments from the last lecture;

“But this still leaves the central bank with a very limited armoury with which to fight against a potentially dangerous asset price boom. The interest rate, which it does not have a clear mandate to use, and public persuasion, which is of limited effectiveness; how would it cope if it faced an asset price boom of the magnitude of those that occurred in the United States in the 1920s or Japan in the 1980s?

Not very well, I expect, and it would probably be held largely responsible for the distress that accompanied the bubble's eventual bursting.

It is still too early to judge whether the current approach to monetary policy will need to adjust to cope with evolving challenges. Looking back at the evolution of monetary and financial affairs over the past century, shows that all policy frameworks have had to be adjusted when they failed to cope with the emergence of a major problem. The succeeding framework was then pushed to its limits, resulting in a new economic problem. The lightly-regulated framework in the first two decades of the 20th century was discredited by the Depression, and replaced by a heavily regulated one accompanied by discretionary fiscal and monetary policy. This in turn was discredited by the great inflation of the 1970s and was replaced by another lightly-regulated one, with greater emphasis on medium term, anti-inflationary monetary policy. This has acquitted itself well over the past 15 years and is still working effectively; but over the next decade or two will probably face the type of challenge I have outlined.

I have tried in this final lecture, to take a very long-term view, although in truth, no-one is very good at picking the next major epic. We mainly react after the damage has been done. I'm influenced by the fact that as the great inflation of the 1970s was building up from the mid-1960s, no-one, including the central bank, had a mandate to prevent it. As we struggled to come to grips with it, governments took decisions that effectively gave the central bank a mandate and central banks worked out a framework that to date has been effective in dealing with it. No-one though, has a clear mandate at the moment to deal with the threat of major financial instability associated with an asset price boom and bust.

Yet I cannot help but feel that the threat from that source is greater than the threat from inflation, deflation, the balance of payments and the other familiar economic variables that we have confronted in the past.”