Bartleby The Central Banker

The Reserve Bank of Australia has delivered 28 years of solid growth in NGDP. Unfortunately, its recent performance has been subpar. Even more worrying is the fact that its communication has been borderline incoherent:

In its quarterly monetary policy review earlier this month, the RBA downgraded a series of economic forecasts, including growth, wages, consumption and inflation, and warned “further easing could unintentionally convey an overly negative view of the economic outlook”.

It said it was prepared to cut rates again, if required, to stimulate growth but flagged the possible use of unconventional monetary policies. Philip Lowe, RBA governor, is due to deliver a speech later this month outlining options, which are likely to include negative interest rates and large-scale buying of government bonds.

Actually, it would be more accurate to say that making the statement, “further easing could unintentionally convey an overly negative view of the economic outlook” is itself likely to unintentionally create an overly negative view of the economic outlook. Markets will look at that sort of statement and assume the RBA doesn’t know what it is doing.

This statement is just one more indication that the problem in central banking is not the zero lower bound, it’s a much deeper failure. Central banks seem paralyzed for some reason that I don’t fully understand. Ben Bernanke noticed this phenomenon way back in 1999.

As an analogy, we’ve all known someone who stayed in a dysfunctional relationship that they should have left. To an outsider, it’s hard to understand why they stay in a relationship where they are subjected to continual abuse.

Similarly, people like Bernanke and I have trouble understanding why so many central banks clearly need to do something and yet hold back for some unknown reason. Why? It’s one of life’s great mysteries.

As a result of their paralysis, there are now calls for fiscal stimulus in Australia:

The Liberal-National government is now under increasing pressure to abandon its election pledge to return the budget to surplus for the first time in more than a decade and instead to unleash fiscal stimulus via tax cuts and infrastructure spending.

After all, it worked great in Japan: