Transcript of Question & Answer Session Remarks at Jackson Hole Symposium

Philip Lowe


(22:49) A question for Philip Lowe, just building on something that Barry said. I completely agree that there are heightened expectations and central bankers really face the challenge of tools that are not up to those expectations given the state of the world that we're in.

And so my question is, given this framework of constrained discretion, what is your view about how constrained central bankers should be at the moment and, frankly, using their discretion to communicate to the broader public as Barry was pointing out the limitations, frankly, of the tools that they have at hand and, frankly, the inadequacy of our elected leaders in actually passing structural reforms and other things which really are better suited to dealing with these issues? I point to one example, I thought was pretty artfully done. In October of 2016, Stan Fischer gave a speech at the Economic Club of New York, which he talked about interest rates, but talked almost exclusively about the supply side factors that affect interest rates. It was a little more subtle in October 2016 than he was yesterday in pointing out the deficiencies of leadership.

But I wonder what your view is on that and then finally, the point about stories. I think Barry's absolutely right, thinking about broader constituencies is fundamental. I'll give a small, a very small but economic example that I know because that's where I'm from. Jamaica has really shifted the dynamic recently on storytelling and realised after basically 40 years of dealing with high inflation and an unstable economy, they had to take it upon themselves, the Bank of Jamaica, to really try to shift the political equilibrium by communicating directly with not people who run banks, but people who run fruit stands and are regular sort of members of the citizenry in order to change the political dynamic that basically that demand for low and stable inflation using, of course, reggae music. So, my question is, again, in the spirit of constrained discretion, to what extent are advanced economy central banks willing to be a little more humble and sort of reach out to these broader constituencies that Barry underscored. Thank you.


(30:46) To Philip, I want to rebound on something that a number of people have brought up, but with a slightly different twist. You mentioned that the Central Bank of Australia, the Reserve Bank of Australia has three pillars instead of two and the third pillar is prosperity, which is different from full employment. And I interpret this as meaning that it is something about distribution and not just levels of output. So that brings, sort of, two comments.

One is, do you think you live in a world, at least in Australia, the way you describe the implementation of monetary policy was reminiscent of the divine coincidence. Well, it is that you let the exchange rate float, you have an inflation targeting and yet somehow you achieved low and stable inflation and an economy that's been astonishingly growing for 28 years. So that sounds very close to, you know, divine coincidence in the kind of models we have where you just implement monetary policy and you achieve two objectives. To achieve the prosperity you'd need to achieve sort of a double divine coincidence and so I wanted your views about whether you think that this is achieved, how that gets integrated into your policy framework because that's a very relevant and important question going forward.

Philip Lowe

(41:49) I'm really pleased to see the discussion on communication, because I often get frustrated with the heavy emphasis on the models, the equations and dealing with financial markets. And I'm always looking for ways of being able to tell stories, a bit like Stefan, and it's a work in progress, and I'm not really sure what the best way of doing that is.

Somebody asked about when we're communicating, should we communicate the limitations of monetary policy and the options for using other levers, and I think the answer there is going to be very country-specific. I'm very careful not to tell the government what to do. They don't tell me what to do either. So there's kind of a delicate balancing act there, but at least in our system, I felt there's been a role for me to set out the options. Not to say which options should be taken – I think people can often infer what I think is the right option – but I think the central bank, particularly where it has credibility, can set out options for the community, and hopefully that leads to a broader discussion of those options, and over time, that shapes the political debate, but I do think we have to be careful not to tell other people what to do.

Another issue that was raised was Australian success and the role of the prosperity mandate in the central bank. I want to make it very clear that I'm not saying that monetary policy is what's driven our economic success. It's just one of the many factors. We've had a lot of luck, we've got good fundamentals, we've got great natural resources, we've got a rapidly growing population, and we've got good institutions, and we had a flexible and floating exchange rate. So monetary policy is just one element of that.

The prosperity element of our objective function, I want to make it clear that that's not about distribution. It's really about the frame of reference. When we're discussing our interest rate decisions, we often ask, ‘Is this going to serve the collective welfare of the people of Australia?’ That's our starting frame of reference, and I'll give you an example. In 2017, we had inflation that was low. It was below our target, and we decided not to cut interest rates. And we knew it was going to stay below our target for quite some time. And the reason we did that, in our discussions at our board, we said ‘would cutting interest rates just to get inflation up a bit more quickly, even though the labour market's quite strong, would that be in the collective interest of the country? Because we can get a bit more inflation, but it would come with more borrowing and higher asset prices. Is that in our collective interest?' And at the time, my board made the judgement that it was not in our collective interest, and we were able to do that because we had this overriding objective of serving the welfare of the people of the country.

And last point I want to make is, to follow up the remark that Jacob made, in Australia, we tried every single exchange rate regime. We've had a fix to the US dollar, a fix to the Pound, a fix to the trade weighted index, a moving kind of basket, we've done everything, and we moved to a floating exchange rate in the early 1980s, and it was the best thing we've done. When we first moved to a floating exchange rate, there was a lot of hand-wringing that this just wouldn't work for us because we didn't have the capital markets, people couldn't hedge risk, and so there was a lot of managing of the exchange rate in the early stages and a lot of angst.

But what we found was that by letting the exchange rate move, the markets actually develop. You can have mindset that says, ‘We can't let the exchange rate move, because the markets aren't there’, but our experience is let the exchange rate move and the markets quickly develop, as long as the institutions and the policy framework's good, and within five years, we developed deep and liquid hedging markets that allowed us to move successfully with a highly volatile exchange rate.

Thank you.