Latest news with #PhillipsCurve
West Australian
4 days ago
- Business
- West Australian
Dimitri Burshtein & Peter Swan: If RBA slashes rates this month, it will be giving in to political pressure
It may be heresy to say, but the case for an official interest rate cut at the coming RBA monetary policy board meeting is exceptionally weak. Austrian born economist Friedrich Hayek once observed that 'the root and source of all monetary evil is the government's monopoly on money.' In Australia, that monopoly takes form in the RBA — an institution notionally independent, but increasingly susceptible to political pressure. Following recent data which showed inflation remaining within and not below the RBA's target band, the usual chorus of economic commentators and political actors have launched into a ritualistic call for a rate cut. And as the August 2025 Monetary Policy Board meeting approaches, these calls are growing in both volume and vehemence. For the RBA to heed these demands would not simply be an error but it would represent a further descent from a disciplined monetary authority into a compliant servant of political convenience. The RBA's mandate is neither ambiguous nor advisory. It is enshrined in legislation: to ensure price stability, full employment, and the economic prosperity of the Australian people. Nowhere in the RBA Act is there an obligation to underwrite misguided fiscal policies or to provide political cover for governments unwilling to confront the consequences of their own policy malpractice. Yet that is precisely what a rate cut would amount to at this juncture. A backdoor bailout of bad fiscal and regulatory policy suppressing economic growth and productivity all under the guise of independent monetary policy. Evidence of persistent economic pressures across key sectors of the economy abound. These pressures are not being driven by private sector exuberance but by reckless fiscal expansion at all three levels of government. Governments have overstimulated demand while constricting supply through over-regulation, sky high energy costs, and an expanding public sector that absorbs available labour. In this context, a rate cut would simply exacerbate the underlying causes of Australia's economic malaise by further distorting the allocation of capital and labour, rewarding inefficiency while penalising prudence. There is equally no compelling case for monetary stimulus based on labour market data. Unemployment remains historically low. And while there are tentative signs of a slowdown in private sector hiring, the slack is being absorbed by growth in the public and care economy. If the RBA cuts rates now, it will not be reviving a flailing private sector. It will be validating a dangerous economic realignment: one that favours public consumption over private investment, short-term palliatives over structural reform, and ideological convenience over empirical rigour. Prevailing arguments for a rate cut are based in the flawed logic of the Phillips Curve — the mid-20th century economic model that posits a trade-off between unemployment and inflation. But the Phillips Curve has failed repeatedly. It failed to anticipate stagflation in the 1970s, failed to explain the low-unemployment, low-inflation paradox of the 2010s, and fails to grasp the unique drivers of today's price instability. Continuing to base policy on such a model is akin to navigating a storm with a broken compass. Real world outcomes have diverged too often from its predictions to treat it as a reliable guide. To make matters worse, Australia's currency has declined by more than 7 per cent over the past five years. In a country that imports the majority of its essential goods — from fuel to food, electronics to pharmaceuticals — a weaker dollar has a direct effect on household costs. A rate cut now would almost certainly further accelerate currency depreciation, amplifying imported inflation. This risk alone should give any responsible policymaker pause. Yet the calls for easing continue, not because the data demands it, but because habit, ideology, and political cowardice conspire to make it seem palatable. A rate cut in August would additionally punish savers, reward speculators, erode the purchasing power of the dollar, and send an unmistakable message that the RBA no longer takes its inflation target seriously. Worse, it would reinforce the delusion that the bank exists to smooth every bump in the economic road, regardless of whether that road was poorly built to begin with. This is not just an Australian phenomenon. Since the tenure of Alan Greenspan in the US, central banks around the world have morphed from guardians of price stability into crisis managers and economic nannies. The so-called 'Greenspan Put', the expectation that central banks will always ride to the rescue at the first sign of market discomfort has corrupted monetary policy, undermined fiscal discipline, and left global economies addicted to cheap credit. The result has been decades of asset bubbles, rising inequality, chronic debt dependence, and an institutional inability to endure even mild economic correction. Monetary policy must return to first principles: price stability first; everything else second. If the RBA hopes to preserve its credibility, its independence, and its very relevance, it must hold the line, ignore political pressure and not cut the official interest rate. Dimitri Burshtein is a principal at Eminence Advisory. Peter Swan AO is emeritus professor at the UNSW-Sydney Business School.
Forbes
5 days ago
- Business
- Forbes
The Federal Reserve Isn't What Pundits Want It To Be, And Never Was
The Fed's mandates are rooted in endless fallacy, most prominently the discredited Phillips Curve which says economic growth causes prices to rise. Please keep this in mind as monetary policy grandees pen high-toned pieces musing about what the next Fed Chairman should think about, and do. All it takes to see the foolishness of everything central-bank related is to contemplate the Fed's 'price stability' mandate. While thinking about it, perhaps Google 'I, Pencil' to see the myriad global inputs that go into the making of something so prosaic. Having done that, stop and think about other market goods like Boeing planes, GM cars, and Apple iPhones. Considering planes alone, the recently mothballed 747 was a consequence of six million different parts manufactured around the world. Rest assured that GM cars aren't much different, after which iPhones can claim inputs from six different continents. Think seriously about all this as economists spend endless time musing about who should take over for Jerome Powell. Oh, the conceit! They desire a focus on 'price stability,' and they think deeply about whether 'the Fed should modify its 2% inflation interpretation' (John Cochrane) without acknowledging what's true: price stability is not only undesirable, it's a mandate that the Fed could never fulfill in the first place. Starting with the undesirable part, it is prices that organize the market economy. That they bounce all around is a feature of the organization as price movements tell producers what to produce more or less of. The movements up and down are evidence of neither inflation nor deflation when it's remembered that a rising price signals fewer dollars for other purchases, and a falling price signals more. Price movements by their very name balance each other. As for the Fed's role in prices, whether stable or unstable, the mere discussion isn't serious. Exactly because market goods are an effect of remarkably sophisticated global cooperation among billions of hands and machines, the idea that Jerome Powell, his lieutenants, and hundreds of egghead economists under them could engineer 'price' anything is too silly for words. To which some will say that the Fed isn't fiddling with prices when it attempts to meddle in the workings of the economy, rather the Fed is trying to manage credit flows through interest rates lest the U.S. economy become too strong and 'overheat,' thus leading to rising prices. Yes, the discredited Phillips Curve. Back to reality, economies aren't machines, rather they're individuals. And individuals don't overheat as much as their innovations attract copious amounts of capital without regard to what the Fed does. Matched with the capital, the innovators find all manner of ways to produce more for less, on the way to falling prices. Yes, the surest sign of economic growth is falling prices. Which is just a comment that 'price stability' is just a variation of Phillips Curve orthodoxy. And it's bogus. As for 'price stability' from the Fed having to do with dollar price stability, that's not part of the Fed's policy portfolio and it never has been. Cochrane observes that 'The Financial and monetary system have evolved past the current Fed,' which is true, but it's 112 years true, not a 2025 thing. Cochrane thinks 'a wise Fed chair will need answers' to his many questions, but the happier truth is that the Fed isn't what Cochrane wants it to be, and thankfully never was. Evidence? The booming U.S. economy.
Mint
24-06-2025
- Business
- Mint
To lower rates in a bold or measured way is a classic dilemma of monetary policy
The minutes of the June meeting of the monetary policy committee (MPC) of the Reserve Bank of India (RBI) were released last week. They tell us a lot about how the fog of uncertainty hanging over the global economy has influenced the thinking of the six MPC members who collectively decide interest rate policy in India. Against the backdrop of trade frictions, sudden movements in the prices of financial assets and growing geopolitical tensions, the minutes mention the word 'uncertainty" as many as 16 times. The word 'certainty" has six mentions, and that too mostly in the context of uncertainty; for example: to 'provide some certainty in the times of uncertainty." Also Read: Has RBI unleashed its arsenal too soon for the economy? How monetary policymakers should respond to uncertainty is a tricky question, as much art as science. The main issue is how monetary policy should be crafted by a central bank when the impact of its policies on the economy is even less predictable than usual. In other words, when it is unclear how firms, consumers and financial markets will respond to changes in interest rates, as is often the case when an economy is being battered by exogenous shocks such as military or trade wars. This leads to what is described as 'parameter uncertainty," which lowers the efficacy of the forecasting models used by central banks to peer into the future. Three of the most important examples of parameter uncertainty are the slope of the Phillips Curve, the level of the natural rate of interest and monetary transmission. The Phillips Curve gives economists a sense of how inflation will respond to a change in the rate of economic expansion. The natural rate of interest is an anchor that modern central bankers use to gauge whether their policy is in tune with the state of the economy. Monetary transmission tells us whether changes in the policy interest rate are filtering down to actual borrowing costs. Also Read: MPC's larger-than-expected rate cut hints at pause to easing cycle: Icra's Nayar Economists have been divided into two camps on the issue of how monetary policy should respond to heightened uncertainty because of exogenous shocks to the economy. One view is that policymakers should be conservative when there is uncertainty in the air. The classic statement of this approach is the Brainard Principle, based on a 1967 paper by American economist W.C. Brainard, who argued that central bankers with limited information should be cautious when it is unclear how a policy change will affect the economy. In March 2019, Mario Draghi of the European Central Bank said: 'You just do what you think is right, and you temper, however, what you are doing with a consideration there is uncertainty. In other words, in a dark room, you move with tiny steps." He was articulating the Brainard Principle. The second approach is diametrically opposite to conservatism. In a 2004 paper that surveys the implications of uncertainty for the design of monetary policy, C.A. Walsh of the University of California at Santa Cruz cites work by other economists that shows how 'it will pay to make sure current inflation is very stable by reacting more aggressively to shocks." Also Read: The Reserve Bank's growth stimulus is a bold bet on price stability Divergent views on monetary policy action in times of heightened uncertainty matter in the current situation. The tricky choice of whether to be cautious or bold is a useful way to frame the MPC's latest decision—in a five-to-one vote—to cut policy interest rates by 50 basis points rather than do it in two steps, as most analysts in financial markets had expected. Saugata Bhattacharya was the only MPC member who voted for a rate cut of 25 basis points. He said that 'a measured and cautious progress in policy easing is more appropriate at this time." The five members who voted in favour of the 50 basis points cut made several points in favour of a decisive move, but what was common in their views was that such a big step would give a clear signal to the private sector economy that the Indian central bank is serious about supporting growth against a backdrop of benign inflation. The underlying calculation is that consumer spending, corporate investment and bank lending would get jolted out of a 'zone of inaction," as Rajiv Ranjan noted. The case for bold action was stated by RBI Governor Sanjay Malhotra: 'It is expected that the front-loaded rate action along with certainty on the liquidity front would send a clear signal to the economic agents, thereby supporting consumption and investment through lower cost of borrowing." Also Read: The Reserve Bank's leap of faith: A big rate cut is very hard to justify Finally, Ram Singh asked an important question about the neutral interest rate, which is the real rate of interest consistent with an economy that is growing at its potential while inflation remains near target. The neutral interest rate is not only statistically difficult to estimate, but could also change with the state of the business cycle. Ram Singh estimated that the neutral interest rate in India had increased from 1.2% to 1.65% because of the rise in public debt and pent-up demand after the covid pandemic. This rate has probably come down now. The upshot: Is it time for economists at RBI to provide new estimates of the neutral rate of interest in India now? The author is executive director at Artha India Research Advisors.
Ammon
06-03-2025
- Business
- Ammon
How can Jordan reduce the Output Gap?
Raad Mahmoud Al-Tal The output gap is a critical economic concept used to assess economic performance by comparing actual output to potential output. The gap arises when actual GDP (Gross Domestic Product) deviates from potential GDP—the level at which the economy is in equilibrium without inflationary or deflationary pressures. When actual output is below potential output, it indicates economic stagnation, higher unemployment, and relatively low inflation. Conversely, if actual output exceeds potential output, it can lead to significant reductions in unemployment but may also drive inflation due to excess demand, resulting in demand-pull inflation. Theoretically, there is a direct relationship between the output gap, inflation, and unemployment. When actual GDP is below potential GDP, it signals underutilized production resources and labor (leading to higher unemployment and lower job opportunities), which in turn slows economic activity and lowers inflation. On the other hand, when actual GDP exceeds potential GDP, the increased demand for labor and resources pushes wages and costs higher, resulting in inflation and lower unemployment. This dynamic aligns with the Phillips Curve, which suggests that reduced unemployment typically causes higher inflation in the short term. However, this relationship is not always stable and depends on the nature of the economy; for example, stagflation (a combination of high inflation and high unemployment) can occur when there are external shocks, such as rising production costs. Regarding Jordan's economic performance and output gap, official data shows that Jordan's real GDP grew by 2.4% in Q2 2024 compared to the same period the previous year. Inflation was 2.3% in January 2025. To determine whether Jordan's economy is experiencing an output gap, it is essential to compare actual GDP with potential GDP. To measure the output gap in Jordan, various methods are typically employed, such as analyzing long-term trends in GDP or using production functions that take into account labor, capital, technology, and other production factors. In Jordan, there are no officially published estimates of the output gap. However, considering the low growth rates, low inflation, and high unemployment (the unemployment rate for Q3 2024 was 21.5%), it can be inferred that the economy is not operating near its potential, suggesting a significant output gap. Several key factors contribute to the output gap in Jordan, with the high unemployment rate being particularly notable in recent years, pointing to an excess supply in the labor market. Monetary and fiscal policies also play an essential role, as the central bank focuses on price stability and controlling inflation, which mitigates the impact of the output gap on prices. Additionally, regional and global conditions influence investment and trade, affecting domestic demand and economic growth. The variation in growth, inflation, and unemployment rates in Jordan suggests the presence of an output gap between actual and potential GDP, which may lead to economic imbalances. To ensure long-term economic stability, it is crucial to boost productivity in Jordan by improving the business environment, providing incentives for key productive sectors, and increasing labor market flexibility through skill development and training programs aimed at reducing structural unemployment. Controlling inflation through balanced monetary policies is also vital for maintaining price stability without negatively impacting growth. Regular monitoring of the output gap using advanced analytical models is necessary. Improving productivity and enhancing the business environment remain fundamental for achieving sustainable growth and long-term economic stability. Reducing the output gap in Jordan requires long-term strategies that focus on innovation and improving the efficiency of key sectors, such as pharmaceuticals, food processing, mining, agriculture, and other critical sectors identified in the Economic Modernization Vision. These measures can increase productivity, create new job opportunities, reduce unemployment, and support sustainable economic growth. Strengthening public-private partnerships, investing in infrastructure, and enhancing education and vocational training will also help boost actual output levels. Achieving economic stability and attracting foreign investment will further support growth and reduce the impact of economic fluctuations, as demonstrated by the experiences of countries like Singapore, which successfully implemented digital transformation, supported start-ups, and developed vocational education to enhance productivity and competitiveness.
Jordan Times
06-03-2025
- Business
- Jordan Times
How can Jordan reduce the Output Gap?
The output gap is a critical economic concept used to assess economic performance by comparing actual output to potential output. The gap arises when actual GDP (Gross Domestic Product) deviates from potential GDP—the level at which the economy is in equilibrium without inflationary or deflationary pressures. When actual output is below potential output, it indicates economic stagnation, higher unemployment, and relatively low inflation. Conversely, if actual output exceeds potential output, it can lead to significant reductions in unemployment but may also drive inflation due to excess demand, resulting in demand-pull inflation. Theoretically, there is a direct relationship between the output gap, inflation, and unemployment. When actual GDP is below potential GDP, it signals underutilized production resources and labor (leading to higher unemployment and lower job opportunities), which in turn slows economic activity and lowers inflation. On the other hand, when actual GDP exceeds potential GDP, the increased demand for labor and resources pushes wages and costs higher, resulting in inflation and lower unemployment. This dynamic aligns with the Phillips Curve, which suggests that reduced unemployment typically causes higher inflation in the short term. However, this relationship is not always stable and depends on the nature of the economy; for example, stagflation (a combination of high inflation and high unemployment) can occur when there are external shocks, such as rising production costs. Regarding Jordan's economic performance and output gap, official data shows that Jordan's real GDP grew by 2.4% in Q2 2024 compared to the same period the previous year. Inflation was 2.3% in January 2025. To determine whether Jordan's economy is experiencing an output gap, it is essential to compare actual GDP with potential GDP. To measure the output gap in Jordan, various methods are typically employed, such as analyzing long-term trends in GDP or using production functions that take into account labor, capital, technology, and other production factors. In Jordan, there are no officially published estimates of the output gap. However, considering the low growth rates, low inflation, and high unemployment (the unemployment rate for Q3 2024 was 21.5%), it can be inferred that the economy is not operating near its potential, suggesting a significant output gap. Several key factors contribute to the output gap in Jordan, with the high unemployment rate being particularly notable in recent years, pointing to an excess supply in the labor market. Monetary and fiscal policies also play an essential role, as the central bank focuses on price stability and controlling inflation, which mitigates the impact of the output gap on prices. Additionally, regional and global conditions influence investment and trade, affecting domestic demand and economic growth. The variation in growth, inflation, and unemployment rates in Jordan suggests the presence of an output gap between actual and potential GDP, which may lead to economic imbalances. To ensure long-term economic stability, it is crucial to boost productivity in Jordan by improving the business environment, providing incentives for key productive sectors, and increasing labor market flexibility through skill development and training programs aimed at reducing structural unemployment. Controlling inflation through balanced monetary policies is also vital for maintaining price stability without negatively impacting growth. Regular monitoring of the output gap using advanced analytical models is necessary. Improving productivity and enhancing the business environment remain fundamental for achieving sustainable growth and long-term economic stability. Reducing the output gap in Jordan requires long-term strategies that focus on innovation and improving the efficiency of key sectors, such as pharmaceuticals, food processing, mining, agriculture, and other critical sectors identified in the Economic Modernization Vision. These measures can increase productivity, create new job opportunities, reduce unemployment, and support sustainable economic growth. Strengthening public-private partnerships, investing in infrastructure, and enhancing education and vocational training will also help boost actual output levels. Achieving economic stability and attracting foreign investment will further support growth and reduce the impact of economic fluctuations, as demonstrated by the experiences of countries like Singapore, which successfully implemented digital transformation, supported start-ups, and developed vocational education to enhance productivity and competitiveness.
