What happens when you let NGDP Drop below the trend level target?

You go the “(un)conventional” way:

The Reserve Bank of Australia has drafted an emergency playbook to follow the world’s major central banks in embracing extreme monetary policy as global interest rates stumble to historic lows and the Australian dollar stays stubbornly high.

Until mid-2014, Australia was doing nicely. In the past two years, however, it began worrying about asset bubbles:

Addressing members of the Committee for Economic Development of Australia (CEDA) lunch in Adelaide, he said monetary policy aimed at encouraging business investment and generating employment amid global economic weakness was in danger of creating a housing bubble in Australia.

And continued to do so one year on:

The Reserve Bank of Australia’s surprise decision to defer its widely anticipated April rate cut for at least another month might have been influenced by the increasingly pricey housing market, which it regards as posing a real “dilemma”.

According to UBS, in March the ratio of Australian dwelling prices-to-disposable household incomes equalled – and is presently surpassing – the previous record of 5.3 times set back in September 2003. And they predict it will climb further.

The policy interest rate has been lowered significantly. So what? That only means that monetary policy has been tight, something easily gleaned from the behavior of NGDP growth and inflation.




What Australia should do is try to get NGDP back on trend, which has served it well.


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