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Is the RBA Economic Logic Faulty?

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  • Eduardo Pol

Abstract

Over the last quinquennium, low wage growth has been a distinguishing feature of the Australian economy preventing the Reserve Bank of Australia (RBA) to achieve its inflation target. Notwithstanding the current record low cash rate, wage growth remains low. This paper casts doubts about the economic logic of the RBA in relation to the behaviour of wages. We argue that an unlimited supply of labour leads to a vertical Phillips curve in the short‐run, and therefore, significant wage growth cannot be expected to happen irrespective of how low the cash rate is.

Suggested Citation

  • Eduardo Pol, 2020. "Is the RBA Economic Logic Faulty?," Economic Papers, The Economic Society of Australia, vol. 39(3), pages 259-269, September.
    • Handle: RePEc:bla:econpa:v:39:y:2020:i:3:p:259-269
    DOI: 10.1111/1759-3441.12289
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    References listed on IDEAS

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    1. James Bishop & Michael Plumb, 2016. "Cyclical Labour Market Adjustment in Australia," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 11-20, March.
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    3. de Brouwer, Gordon & Ericsson, Neil R, 1998. "Modeling Inflation in Australia," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 433-449, October.
    4. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
    5. Kristin Forbes, 2019. "Has globalization changed the inflation process?," BIS Working Papers 791, Bank for International Settlements.
    6. Alexander Ballantyne & Tom Cusbert & Richard Evans & Rochelle Guttmann & Jonathan Hambur & Adam Hamilton & Elizabeth Kendall & Rachael McCririck & Gabriela Nodari & Daniel M. Rees, 2020. "MARTIN Has Its Place: A Macroeconometric Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 96(314), pages 225-251, September.
    7. James Bishop & Linus Gustafsson & Michael Plumb, 2016. "Jobs or Hours? Cyclical Labour Market Adjustment in Australia," RBA Research Discussion Papers rdp2016-06, Reserve Bank of Australia.
    8. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
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