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INTERVIEWS
WITH ECONOMISTS
DR
GILLIAN HEWITSON
Dr Hewitson
has a strong interest in monetary economics and has published
in the area of post-Keynesian monetary theory. She teaches money
and banking and macroeconomics at La Trobe University.
It is often
claimed that independent central banks are better inflation fighters
than those that are not. Do you think that the RBA should be given
more independence from the Federal Government?
The idea that
central banks should be independent of the government emerged
in the literature in the late 1980s. It derives from a theoretical
framework which views price stability as the true goal of central
banks, and independence of the central bank from the government
as a necessary precondition for the central bank to be free to
pursue that goal relentlessly. Post-Keynesians reject this idea
for a number of reasons, primarily because it is based on a model
in which money is neutral and therefore price stability is deemed
to be the only appropriate goal of the central bank, and the economy,
without government interference, will move to a point of equilibrium
at the natural rate of unemployment. If money and the financial
system are not neutral, and if the economy has no natural rate
of unemployment, then monetary policy is as important as fiscal
policy in establishing the conditions for full employment, and
these policies should be coordinated rather than separately pursued.
Do you
consider inflation to be a purely monetary problem?
Using the
equation MV = PQ (M = money supply, V = velocity of money, P =
price level, Q = output), it is clear that if the values of V
and Q are fixed, or at least their values are determined independently
of M, an increase in P must be accompanied by an increase in M,
and in this sense inflation is a monetary phenomenon. But there
are a number of problems with the idea that exogenous increases
in M cause increases in P. The money supply is endogenously determined.
The central bank sets the interest rate not the quantity of money
in the economy. The central bank must meet the liquidity demands
of the financial system or risk its collapse. It cannot control
quantities, but it can vary the price at which funds are available.
The growth of monetary aggregates is hence a result of the demand
for credit. So the direction of causation is not from M to P.
In general, post-Keynesians believe that cost-push inflation is
a more important explanation of inflation than demand-pull inflation,
or inflation caused by exogenous changes in M. Cost-push inflation
is the result of disputed distributional shares. Workers, profit-earners
and government are the three main recipients of shares of national
income. If wage earners push up wages to raise their share of
income, profit-earners raise prices in order to retain their share
of national income. Cost-push inflation is accommodated in the
credit market, at a price determined in the first instance by
the central bank. Hence, post-Keynesians advocate income policies
as the key to price stability, rather than monetary targeting
or independent central banks.
The RBA
has a specific inflation target but not an output target. What
is your view on this issue?
Post-Keynesians
reject the idea that the Phillips curve is vertical in either
the short run or the long run. They therefore reject the idea
of a natural rate of unemployment. They argue that monetary policy,
implemented through the price of credit, determines the rate of
growth in the economy (and hence employment), but that a high
rate of growth requires an inflation trade-off. A negative real
interest rate is neither desirable nor politically feasible, so
that there are limits to the extent to which this trade-off can
be pushed. However, a zero inflation target is equally as undesirable,
given its implications for growth and employment within this model.
Post-Keynesians suggest that, since there is no ‘natural
rate of interest’ determined by the underlying factors of
the productivity of capital and the thriftiness of households,
central banks should target a low real rate of interest to induce
a higher level of growth and lower unemployment. Inflation will
be higher, but it will be stable rather than accelerating as in
the conventional model, and with a targeted real rate of interest,
the distributional impact of inflation will be eliminated.
What are
your views on the Wallis Report on the Australian financial system?
The Wallis
Report covers a vast range of issues and makes some 115 recommendations.
Of great importance to post-Keynesians is the separation of the
lender-of-last-resort role from the role of prudential supervisor.
This is because post-Keynesians believe that monetary and real
variables are inherently integrated. That is, they reject the
classical dichotomy where money, at least in the long run, does
not impact on the values of real variables, like output and employment,
but only affects prices. This means that the financial system
plays a key role in determining economic outcomes. Indeed, the
creation and destruction of money within normal economic processes
means that the orderly functioning of the financial system is
of vital importance to the avoidance of systemically induced failures
to meet nominal commitments and, hence, the collapse of businesses,
with major impacts on confidence, investment, consumption and
employment. From a post-Keynesian perspective, then, the separation
of the lender of last resort from the prudential supervisor is
of great concern because it may increase, rather than reduce,
systemic instability arising from the financial system.
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