Australia is asleep at the wheel

While American households delivered during the GFC Australians continued to borrow. Now the Reserve Bank’s take on private debt acceleration is reminiscent of the Fed before it was proven wrong.

Last week I satirised Australia’s outmoded belief that the rate of interest can be used to fine tune the economy. This belief was ensconced in the so-called “Taylor Rule”, which accurately described what central banks tended to do until the economic crisis hit in 2007. That rule saw the inflation rate and the unemployment rate as the two key economic indicators, and the interest rate as the key mechanism needed to achieve an acceptable balance between them.

Of course, the crisis blew that rule out of the water, and issues that central bankers once dismissed as unimportant - like, for example, asset price bubbles or the level of private debt - suddenly had to be discussed.


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