The “Rat Pack” loses one member (Australia)

(Note to generation y: The Rat Pack was the name given to a group of actors led by Frank Sinatra Dean Martin and Sammy Davis Jr)

In 2005 Edward Nelson, at the Research Department of the St Louis Fed, wrote a very interesting paper entitled “Monetary Policy Neglect and the Great Inflation in Canada, Australia and new Zealand”. From the abstract:

This paper studies the Great Inflation in Canada, Australia, and New Zealand. Newspaper coverage and policies, and the different movement in each country away from 1970s views. I argue that to understand the course of policy in each country, it is crucial to use the monetary policy neglect hypothesis, which claims that the Great Inflation occurred because policymakers delegated inflation control to nonmonetary devices. This hypothesis helps explain why, unlike Canada, Australia and New Zealand continued to suffer high inflation in the mid-1980s. The delayed disinflation in these countries reflected the continuing importance accorded to nonmonetary views of inflation.

Before that, Robert Hetzel wrote in “Arthur Burns and Inflation”:

How did Burns view macroeconomic policy as an economist? Most generally, Burns had a credit view of monetary policy. That is, monetary policy worked through its influence on the credit market. However, monetary policy was only one factor affecting credit markets. At times, in its influence on inflation, monetary policy could be overwhelmed by other factors. More specifically, Burns had a real or nonmonetary view of inflation. That is, inflation could arise from a variety of sources other than just money. He believed that a central bank could cause inflation by monetizing government deficits but did not attribute inflation to that source in the early 1970s. Instead, he attributed it to the exercise of monopoly power by unions and large corporations.

If conventional monetary policy weapons were powerless to deal with these forces, then perhaps direct controls might work. Accordingly, President Nixon imposed wage and price controls on August 15, 1971.

Only missing from the “Rat Pack” (of Anglo Saxon countries) is the UK. I´ll just assume the UK “followed the pack” (not a heroic assumption given Labour was in power from 1974 to 1979.and no one will “accuse” Labour to be “monetary oriented”)

Nelson presents a set of charts that I expand by including the US and UK. In all charts inflation refers to the four quarter percent change in the headline CPI. For ease of comparison all charts have the same scale.

Note that Canada, the UK and US “got smart” at the same time (vertical dashed bar). Maybe “news” travels slowly over the date line because (as chronicled by Nelson) the “Eastern branch of the Pack” only successfully disinflates when the “Western branch” implements a second round of disinflation.

The fact is that by the early 1990s they were all set to go. And “go” they did. The tables present summary statistics for some relevant macroeconomic quantities first for the 1992-07 (“Great Moderation” period) and then for 2008-13 (“Great Recession” period).

Table 1: 1992 – 2007

	NGDP  Gr.	St. Dev.	Inflation	St. Dev,	RGDP Gr.	St. Dev.
Australia	6.5%	1.5	2.5%	1.5	3.7%	1.1
N. Zealand	5.7%	2.2	2.1%	1.1	3.6%	1.9
Canada	5.2%	2.2	1.9%	0.8	3.0%	1.4
UK	5.5%	0.9	2.0%	0.9	3.3%	1.1
US	5.5%	1.2	2.6%	0.7	3.3%	1.2

 

Table 2 2008 – 2013

	NGDP  Gr.	St. Dev.	Inflation	St. Dev,	RGDP Gr.	St. Dev.
Australia	5.5%	3.2	2.7%	1.0	2.5%	0.8
N. Zealand	3.5%	2.5	2.4%	1.5	1.4%	1.9
Canada	3.2%	4.1	1.6%	1.0	1.3%	2.1
UK	2.1%	3.0	3.2%	0.9	-0.2%	2.8
US	2.5%	2.5	2.0%	1.6	1.0%	2.2

Note that all explicitly inflation targeting countries (except US) were successful in keeping inflation “on target” (2%-3% for Australia; 1%-3% for N. Zealand; 2% for both Canada and UK) during the “Great Moderation”. For the “Great Recession” period, the US has adopted an explicit 2% target and is “on target”. So are Australia and N. Zealand, But Canada has fallen short while the UK has overshot.

The big difference between the two periods is in RGDP growth. With the exception of Australia real growth has dropped to less than half what it was from 1992 to 2007. In the case of the UK it has completely disappeared in the last 6 years! For the “Western Branch of the Pack” real growth has also become quite a bit more volatile (higher standard deviation), while remaining stable in the “Eastern Branch”.

The panel below shows why Australia´s performance has been so much better than the rest. It was the only member of the “Pack” that did not allow nominal spending (NGDP) to drop (sometimes deeply) below the trend path. New Zealand is trying to make a “come back”. Maybe it will be successful if ‘shrill voices’ don´t get a hearing!

The tables have turned. Differently from the “Great Inflation”, now it´s the “Western Branch of the Pack” that has to follow in the footsteps of its “Eastern Branch”, or risk losing at least one member that managed to “speed ahead”!