"Structural Change and the Conduct of Monetary Policy"
http://www.rba.gov.au/Speeches/sp_dg_300803.html
Here are the parts of Glenn Stevens' speech that I found most interesting
(slightly summarised / paraphrased)
With respect to Monetary Policy, changes in the financial structure of the economy is probably the most difficult for the RBA to deal with.
One of the most striking areas of financial change in recent times has been the increased opportunity for households to adjust their financial positions
- Access to credit has expanded
- Decline in inflation has produced lower interest rates
- Lenders find households less risky borrowers than companies
- Financial innovation also means there is much greater opportunity to collateralise assets
- With the big run up in house prices which has occurred, there is a very large pool of potential collateral which has not been tapped yet
- The ratio of debt to assets has not increased as fast as the ratio of debt to income
We are yet to see the full ramifications of this structural change in household behaviour and balance sheets.
Leverage may yet increase a good deal further, since the as-yet-untapped equity in the housing stock is still very large, and the capacity to access it is growing
It was inevitable that there would be a period of strong growth in lending to households from the mid 1990s until about 2001, but over the past year or two, we have become less confident that a sensible one-time balance sheet adjustment should still be continuing
Dealing with this is still a work in progress, but a few observations come to mind:
It is not very helpful to discuss whether monetary policy should try to prick 'bubbles'. This tends to side-track discussion on to questions like whether we can confidently identify 'bubbles', and whether or not aggressive policy action is appropriate.
Response by monetary policy is bound to be relatively moderate, because the uncertainty about the effect on asset prices is considerable.
The really big "asset price events" and the balance sheet changes which accompany them can be once-in-a-generation developments.
If it was decided that monetary policy should be more responsive to asset price events, such an approach would have to be motivated by a broader and rather more long-term notion of financial and monetary stability than is in common use today.
If we do need to move in the direction of giving asset price and debt developments more weight in the conduct of monetary policy than hitherto, we need to educate our respective communities about these issues.
http://www.rba.gov.au/Speeches/sp_dg_300803.html
Here are the parts of Glenn Stevens' speech that I found most interesting
(slightly summarised / paraphrased)
With respect to Monetary Policy, changes in the financial structure of the economy is probably the most difficult for the RBA to deal with.
One of the most striking areas of financial change in recent times has been the increased opportunity for households to adjust their financial positions
- Access to credit has expanded
- Decline in inflation has produced lower interest rates
- Lenders find households less risky borrowers than companies
- Financial innovation also means there is much greater opportunity to collateralise assets
- With the big run up in house prices which has occurred, there is a very large pool of potential collateral which has not been tapped yet
- The ratio of debt to assets has not increased as fast as the ratio of debt to income
We are yet to see the full ramifications of this structural change in household behaviour and balance sheets.
Leverage may yet increase a good deal further, since the as-yet-untapped equity in the housing stock is still very large, and the capacity to access it is growing
It was inevitable that there would be a period of strong growth in lending to households from the mid 1990s until about 2001, but over the past year or two, we have become less confident that a sensible one-time balance sheet adjustment should still be continuing
Dealing with this is still a work in progress, but a few observations come to mind:
It is not very helpful to discuss whether monetary policy should try to prick 'bubbles'. This tends to side-track discussion on to questions like whether we can confidently identify 'bubbles', and whether or not aggressive policy action is appropriate.
Response by monetary policy is bound to be relatively moderate, because the uncertainty about the effect on asset prices is considerable.
The really big "asset price events" and the balance sheet changes which accompany them can be once-in-a-generation developments.
If it was decided that monetary policy should be more responsive to asset price events, such an approach would have to be motivated by a broader and rather more long-term notion of financial and monetary stability than is in common use today.
If we do need to move in the direction of giving asset price and debt developments more weight in the conduct of monetary policy than hitherto, we need to educate our respective communities about these issues.
