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INTERVIEWS
WITH ECONOMISTS
MARK
TIERNEY
Mark Tierney
was a money market dealer for the Commonwealth Bank during the
period 1983–86. In 1986 he joined the HongkongBank Australia
as a money market dealer and, from 1989 to 1991, was an economist
there. He then joined Bankers Trust Australia in 1991 as a foreign
exchange strategist and became the Senior Economist in November
1998.
Where do
you put the RBA in terms of central bank independence as compared
with other central banks?
Central banks
in several countries are legally independent of the government.
That is, there is legislation that prevents the government of
the day influencing the monetary policy decisions of the central
bank. In Australia, this is not the case. In practice, however,
the RBA is just as independent as most other central banks. Monetary
policy decisions are made by the Board of the RBA, with the government
having no direct input into the decision-making process. Naturally
there may be consultation between the government and the RBA,
with the Commonwealth Treasury being represented on the Board
of the RBA. Yet consultation is an important factor in proper
coordination of economic policies and even central banks with
enviable reputations for independence seek input from their respective
governments. The RBA and the government are also constrained by
a written agreement that sets an inflation target which is the
overriding objective of monetary policy. This objective target,
combined with semi-annual testimonies on monetary policy by the
Governor of the RBA, means that the RBA is one of the more transparent
central banks in the world. Theoretically, the government has
to agree to any adjustment of monetary policy by the RBA. In practice,
however, this is not a major problem. Despite the lack of legislative
support for independence, the RBA can be ranked as a truly independent
central bank.
Does the
RBA truly look at other objectives besides controlling inflation?
The RBA does
not believe that other objectives are incompatible with low inflation.
While it is true that the legislation establishing the RBA does
put the onus on the RBA to aim for low unemployment as well as
low inflation, the RBA argues that achieving low inflation will
eventually lead to lower unemployment. By forcing changes in prices
and wage-setting behaviour, there should be structural changes
in the economy that favour higher productivity. This, in turn,
will flow through to higher real earnings, increased spending
and a stronger economy. So while the short-term objective may
be to lower inflation, the long-term objective is basically the
same: higher living standards.
Does the
situation arise when there is a conflict of goals between the
RBA and the Treasury?
Both organisations
share the same goal, which is the maximum amount of sustainable
economic growth that is consistent with low inflation. ‘Sustainable’
means that the economy does not run into constraints, such as
an excessively high current account, which can cause problems.
If successful, the economy should move towards full employment
and living standards will rise.
How to achieve
this goal can sometimes be a matter for dispute. At times, the
RBA may have a more sombre view on the prospects for economic
growth than has the Treasury. Alternatively, the RBA may judge
that the risks to inflation are higher than the Treasury is forecasting.
This can lead to a conflict over the appropriate setting of monetary
or fiscal policy.
The RBA will
have the last word in the setting of monetary policy in the case
of a dispute. If there is strong conflict, the RBA can notify
the Parliament of a dispute if it wishes to adjust monetary policy
and the government will not cooperate. This has never been done
and, in practice, the RBA will get its way on monetary policy.
Is there
a political business cycle in Australia?
Politicians
may like to think that there is still a business cycle in Australia
that can be manipulated for political purposes, but the evidence
for such manipulation is not strong. Certainly there is a temptation
to have tax rises or spending cuts early in a government’s
term, and perhaps it could be argued that fiscal policy is implemented
in a manner which establishes a political business cycle, but
to couple this with monetary policy, as in the United Kingdom
as late as 1996, is a lot more difficult.
Elections
this decade have been held when interest rates were still extremely
high (1990), low and falling (1993), high and stable (1996) and
low and stable (1998). Economic growth was plummeting before the
1990 election, rising ahead of the 1993 election, slowing ahead
of the 1996 election and rising ahead of the 1998 election. Clearly
there is no discernible pattern during the 1990s.
The economy
has been performing so well since 1992, with any downturn being
mild, that there has been no strong political pressure to manipulate
monetary policy. If this broad stability persists, then the temptation
to pressure the RBA will remain low.
In any case,
now that there is an agreed inflation target, the ability to try
to lift economic growth ahead of an election is limited. So if
politicians were tempted in future years to start a political
business cycle, doing this with monetary policy would be difficult.
Some (free-banking)
economists argue that the trend towards free-market capitalism
should be extended to the markets for financial services. In a
way, this means that central banks should be abolished. How would
you react to this argument?
By now, the
role of the global central banks in countering the threat of financial
contagion from Asia, Russia and Latin America is undoubted. Without
the prompt actions of these central banks, the upheavals in these
regions could have turned into a disaster for the global financial
system. Another depression could have been the outcome.
Most policy
makers have learned the lesson that free markets in finance are
very different from free markets in products. The ability to create
leverage and the subsequent financial speculation mean that banking
is very different from any product market. One of the lessons
from the Asian debacle is that the combination of premature opening
of a country’s capital account and financial speculation
is a recipe for disaster. A similar disastrous outcome from liberalising
the current account is unlikely.
There is actually
a fear that a political backlash could follow the upheavals caused
by wild swings in international capital flows. Such a backlash
could mean that free trade in goods would come under scrutiny
and protectionism would increase. If so, it is possible to argue
that free trade in capital may be incompatible with free trade
in goods.
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