Friday, July 16, 2010

Inflation targeting and the RBA

The targeting of inflation by the RBA has been in effect since March, 1993, as described in this address given in 1999 by Mr G.R. Stevens, Assistant Governor(Economic), to the Economic Society of Australia, Sydney, 20 April 1999.

In it he describes a bit of the history of inflation targeting as conducted by the RBA, and how the RBA uses a flexible target, rather than a fixed, legislated target. This is really in keeping with the RBA charter, which is also found on their website. The charter states:
The Reserve Bank Board sets interest rates so as to achieve the objectives set out in the Reserve Bank Act 1959 :
• the stability of the currency of Australia;
• the maintenance of full employment in Australia; and
• the economic prosperity and welfare of the people of Australia.
Since 1993, these objectives have found practical expression in a target for consumer price inflation, of 2–3 per cent per annum. Monetary policy aims to achieve this over the medium term so as to encourage strong and sustainable growth in the economy. Controlling inflation preserves the value of money. In the long run, this is the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy.

It was a work of genius to be able to eventually tie the objectives of the Reserve Bank to the relativly simple, and only, mechanism of targeting inflation. As a software engineer, I have to say I am impressed that such a complex system as the Australian economy can be controlled by one variable to such a successful degree.

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