Inflation targeting and financial stability in an open economy

Crawford School of Public Policy | Centre for Applied Macroeconomic Analysis

Event details

Seminar

Date & time

Friday 28 June 2019
11.00am–12.00pm

Venue

Seminar Room 2, Crawford School of Public Policy, 132 Lennox Crossing, ANU

Speaker

Augustus Panton, PhD Student, CAMA

Contacts

Rossana Pinto
61 2 61258108

In this seminar, Augustus Panton will present his paper on ‘Leaning against the wind via finance-neutral output gaps: Inflation targeting and financial stability in an open economy’.

In the wake of the global financial crisis (GFC), the debate on the role of monetary policy in promoting and sustaining financial stability has intensified, with a strong reawakening of the view that monetary policy must pre-emptively lean against the wind (LAW) of asset price bubbles — tighten the policy stance more than would be conventionally required, to prevent incipient asset price bubbles from materializing into financial crises.

By ensuring that output gap measures are neutral to domestic financial cycle imbalances, there is growing evidence that monetary policy can promote the traditional objectives of price and output stability without compromising financial stability. In examining the use of finance-neutral output gaps as an approach to following the concept of LAW, the paper presented in this seminar departs from the existing literature in a non-trivial way. Instead of restricting financial stability risks to imbalances only in the domestic financial system, external financial stability risks are modelled within a Bayesian state-space dynamic factor framework along with country-specific and external business cycles. The open-economy output gaps derived from the framework are then decomposed into domestic and external finance-neutral components.

Incorporating the finance-neutral output gaps into simple Henderson-McKibbin-Taylor type monetary policy rules, counterfactual policy simulations show that had monetary policy followed the LAW concept in the period leading to the GFC, policy rates would not have been lower for longer, with the possibility of preventing the GFC or limiting its severity.

Augustus Panton is a PhD candidate in Economics at CAMA in the Crawford School of Public Policy. He is an Adam Smith Fellow at the Mercatus Centre at the George Mason University in the United States and a Teaching Assistant at the ANU Research School of Economics. He was recently awarded the 2019 ANU Vice-Chancellor’s Award for Excellence in Education (Tutoring), having previously won the 2018 Excellence in Tutoring Award in the ANU College of Business and Economics. Augustus is also an ARC Centre of Excellence in Population Ageing Research (CEPAR) affiliated research student. His PhD research focuses on the joint design of monetary policy and climate policy regimes towards optimal macroeconomic stabilization in an environment characterized by climatic disruptions and heightened financial stability risks. Prior to joining ANU, Augustus worked as Economist across several institutions in Liberia, including the Central Bank of Liberia, and provided consulting services, at various times, for several institutions, including the International Finance Corporation/World Bank, and the Brookings Institution.

The CAMA Macroeconomics Brown Bag Seminars offer CAMA speakers, in particular PhD students, an opportunity to present their work in progress in front of their peers, and reputable visitors to showcase their work.

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