Transcript of Question & Answer Session Supporting Growth in the Short Run and the Long Run

David Uren, The Australian

Thank you. David Uren from The Australian. Question for Luci Ellis: You spoke about the impact of market concentration on innovation and monopoly profits potentially leading to a level of complacency. I'm wondering whether, in the Reserve Bank's thinking about market concentration there are concerns that it may affect the transmission of monetary policy, if markets are not working as smoothly as perhaps they might.

Luci Ellis

Thanks, David. It's an interesting question. The role of market concentration and other aspects of distribution across firms, is something that we're taking a great interest in now. We have some people working on the BLADE database that people now have access to through the Australian Bureau of Statistics, which is an excellent initiative. And we'll be able to answer a lot more policy questions using that database, that previously were impossible to answer.

I think our focus there is not so much on could it impede the monetary transmission mechanism, but simply understanding pricing dynamics, and understanding investment dynamics. It's not necessarily from the perspective that we think it might impede the transmission mechanism of monetary policy, it's more about understanding what it means for pricing dynamics, investment and productivity growth.

Ross Garnaut, University of Melbourne

University of Melbourne. Question for Luci or Ephrem. You both drew attention to the impacts on the distribution of wealth of low policy interest rates, easing monetary policy. What would be the consequences of long-term interest rates being permanently low? And I draw attention to the big decline in real interest rates in long-term markets in the last 38 years, accelerated in the last eight. And the fact that real rates, indexed bond rates in the United States, remain not very much above zero, even while we have the United States administration running by far, the biggest budget deficit at this stage of the cycle, in peace time in history.

Luci Ellis

Thanks. It's an important question. There are two parts to it. One is, what's the consequences of low rates for a very long time and it really depends on why rates are lower. One of the things that has come out of the research over recent times, is that the neutral rate, the rate of interest that balances supply and demand of savings at stable inflation and full employment – the sort of equilibrium – if you like, has come down. There are reasons for that.

Some of that's about risk appetite, and that could change. Some of it's about the fact that we went from being high-inflation economies to low-inflation economies. And so there was a risk premium around that, as well. And that's come out. Some of it's about demographics. So these are things that staff at the Bank, and other places have looked at. And it does seem like the neutral rate, the neutral real rate, has come down a bit and that's a reasonably comfortable statement to make about the long run.

And of course, that's a separate consideration from what I was talking about in my remarks around the times that you need to have rates low to actually stimulate the economy and run it a little bit above trend.

The second part of your question related to, well, how compatible is that with what's going on in macroeconomic developments in some other countries? And you're absolutely right. It is extremely unusual to have a large fiscal stimulus at a time of strong growth and almost full employment. And we really don't quite know what that's going to do, but it can be reasonably anticipated that that's going to be quite inflationary for the United States. And it is the case that at present, markets are pricing in strong growth, very low interest rates, but no pick-up in inflation. And so the question is, is the shoe going to drop there? And I think that's a configuration of pricing that does seem hard to square with what is going on but it is quite specific to the US, more so than say here, and the configuration of interest rates here.

Ian Harper

If I may, Luci, some more detail perhaps, on the international research that you guys surveyed in respect of the impact of low rates on the wealth distribution, was particularly, I thought, what Ross was looking for. Could you perhaps just enlighten us a little more with some of the detail there?

Luci Ellis

Sure. So, this was some research that was presented to the Board recently and as I mentioned in my remarks, this is again, more of a story about other countries than Australia. Because firstly, other countries did do asset purchases, and central banks did boost their balance sheets in a way that wasn't necessary here in the same way, and that interest rates didn't have to get as low as they did here.

But the findings of that research is that there are a number of different effects on the wealth distribution from having low rates, or doing asset purchases. Doing asset purchases does tend to boost wealth inequality a bit more than just having low rates. But it really depends on what the wealth distribution looks like, what the asset allocation looks like, and the specifics of the program. There's not a clear-cut message out of any of this.

But one thing that I would mention, we just were talking about superannuation earlier. Of course, one of the reasons why asset purchases and low interest rates are said to boost wealth inequality, is because it boosts equity prices and generally, higher wealth people are the ones who own the equities. Well, in Australia, we all own the equities through our compulsory super. The superannuation system in Australia is very long equities, relative to sort of pension funds in a lot of other countries that are more structured around a defined benefit framework, which tend to be more in fixed interest.

These are much more long equity, and so that actually does benefit everyone who's got superannuation. And so, in some sense, the first-order question around wealth inequality in the Australian context is, are there people who don't have sufficient access to super because of gaps in their working history, and so forth and I think that's the first-order question for Australia.

Michael Roddan, The Australian

I wouldn't mind if Karen just responded to the best in show comments that Chris made just before, and whether you're going to revisit the best in show list for the final report, if you can talk about that. And then broader, for the other panel members, Luci got me thinking about innovation and business. We've seen that the government's bringing forward its small business tax cuts. Innovation doesn't really happen that much in small business, so I'm just wondering if there's any better way to spend this money, and what the panel members' thoughts are on how that money is being spent?

Karen Chester


Luci Ellis

Thank you for posing two questions, and giving me a chance to think about how to reply. The question about tax breaks for small business. Different tax policies have different objectives. One thing – we've recently published some research by some colleagues at the Bank, that showed that some of the tax measures that were put through in the GFC, were very important in boosting investment and basically, continuing business activity through that period.

So it may be that the intent is not specifically to stimulate innovation. I'd firstly make the point that productivity isn't just about innovating in the sense of you discovering something new. It's also about being a fast follower. I talked about the gap between the most productive and the average firm across industries which can be very large. And that's really, not necessarily about you discovering something new, it's also about you making the best use of what's already available and adopting the technologies that are already available.

And so one of the things in this discussion around the dispersion of productivity across firms, is not actually being at the technological frontier of what's already there. So, some of the data in Australia on this, we are seeing firms are adopting cloud computing relatively rapidly. So that's one thing that's available, and people are adopting. Cloud computing allows you to reduce your cost, because you don't have to run your own servers. But automation is the thing that can increase your productivity, and in particular, for a lot of automation of physical equipment, can be very advantageous for improving your work, health and safety outcomes. Those are things that you don't necessarily see small businesses doing, the way they're doing with cloud computing. The automation is much more something we're seeing in large firms.

And so this then comes to this idea of our people adopting technology. What are the sort of things that they're adopting, and is there a bit of a gap there? There is an issue around innovation around the world. Innovation is hard. One thing I find quite informative is some work that a colleague has done looking at all the patents that are cited and registered in Australia.

In Australia, we have some fantastic research being done out of our universities, out of CSIRO, and other non-profit, third sector research. But in terms of private sector firms, one of our biggest producers of patents is Aristocrat, so, poker machines. So, there is a genuine question in Australia about the level of innovation across the private sector, not only in terms of discovering something new, but also about whether people are being fast followers.