In The RBA just reminded us about the “Export Price Norm” Lars Christensen writes:
Under a pure EPN regime the central bank would peg the exchange rate to the export price. This is obviously not what the RBA has done. However, by its communication it has signaled that it would not mind the Aussie dollar to weaken and strengthen in response to swings in commodity prices – and hence in swings in Australian export prices. Hence, if one looks at commodity prices measured by the so-called CRB index and the Australian dollar against the US dollar over the last couple of decades one would see that there basically has been a 1-1 relationship between the two as if the Aussie dollar had been pegged to the CRB index. That in my view is the key reason for the stability of NGDP growth over the past two decades. The period from 2004/5 until 2008 is an exception. In this period the Aussie dollar strengthened “too little” compared to the increase in commodity prices – effectively leading to an excessive easing of monetary conditions – and if you want to look for a reason for the Australian property market boom (bubble?) then that is it.
This morning the RBA had its regular monetary policy meeting and see here is what the bank had to say:
“The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand…On the other hand the exchange rate remains higher than might have been expected, given the observed decline in export prices”
This is a pretty clear restatement of the “export price norm” (“the exchange rate remains higher than might have been expected, given the observed decline in export prices”). Note also the wording “support demand”. “Demand” is basically another word for nominal GDP.
Does an “X-ray” confirm the ‘diagnostic’? It seems it pretty much does so: