Monetary Policy Mistakes and Remedies: An Assessment Following the RBA Review

• Published date: 01 September 2023
• Author: Ross Garnaut,David Vines
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/1467-8462.12528

The Australian Economic Review, vol. 56, no. 3, pp. 273–287 DOI: 10.1111/1467-8462.12528

Special Article

Monetary Policy Mistakes and Remedies: An Assessment

Following the RBA Review

Ross Garnaut and David Vines*

Abstract

This article responds to the Review of the

Reserve Bank of Australia (RBA), which was

released on 20 April 2023. We describe the

underperformance of the Australian economy

over the past decade, and identify the

contribution of RBA mistakes. We suggest

remedies that would improve prospects for

low inflation and unemployment. Returning to

general prosperity requires better coordina-

tion of monetary, fiscal and macro‐prudential

policy and of these with other aspects of

economic policy‐making. We conclude that

while the RBA Review makes some valuable

suggestions about structure and process at the

RBA, it provides little guidance on the content

of policy.

1. Introduction and Summary

The Australian economy has performed badly

for most Australians over the past decade.

Real output per person has grown at well

below the OECD average and real wages fell

over a decade for the first time. Over the seven

years preceding the pandemic recession,

unemployment was stuck at over 5 per cent

and underemployment rose strongly, when

unemployment fell elsewhere in the devel-

oped world. The aftermath of the pandemic

brought radically different circumstances.

Unemployment fell to 3.5 per cent after fiscal

and monetary restraint were abandoned during

the pandemic recession. Inflation rose to well

above the target of 2–3 per cent that had been

followed through the three decades of flexible

inflation targeting. Subsequent statements

from the monetary authorities suggest a view

that unemployment will have to rise substan-

tially for inflation to be brought back to the

target range. These statements reveal an

expectation that the extraordinary reduction

in real wages through the post‐pandemic

inflation will be sustained.

This was the economic context of the

Review of the Reserve Bank of Australia

(RBA) initiated by the Treasurer in July 2022,

and of the discussion of the Review after its

release on 20 April 2023 (de Brouwer, Fry‐

McKibbibn and Wilkins 2023).

This article discusses the Review's conclu-

sions, and asks whether its recommendations

would have led to better outcomes. We will

argue that the RBA has not used its key policy

*Garnaut: The University of Melbourne and The

Australian National University; Vines: Economics

Department and Oxford Martin School, University of

Oxford; Balliol College, Oxford; Centre for Economic

Policy Research. Corresponding author: Vines, email

<david.vines@economics.ox.ac.uk>. The authors are

grateful for helpful discussions with Olivier Blanchard,

Gordon de Brouwer, Glyn Davis, Bob Gregory, Stephen

Grenville, Renee Fry‐McKibbin, Iain Ross and Bob

Rowthorn, and with a number of senior officials at the

RBA. The authors have also received valuable comments

from participants at the Melbourne Economic Forum

which was held on 29 May to discuss the RBA Review,

and from participants at the Australian Conference of

Economists which was held in Brisbane on 12 July.

© 2023 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research, Faculty of Business

and Economics.

Published by John Wiley & Sons Australia, Ltd