Reforming Australian Monetary Policy: How Nominal Income Targeting Can Help Get the Reserve Bank Back on Track

Abstract

This paper makes the case for the adoption of nominal income targeting in the context of an improved governance and accountability framework for the Reserve Bank of Australia (RBA). The paper begins by outlining the existing governance and inflation targeting framework for Australian monetary policy. The RBA has increasingly underperformed its inflation and full employment mandates under this framework because of a combination of policy errors and policy choices. This left the Australian economy with a weak starting point going into the COVID-19 pandemic. The RBA’s initial response to the pandemic was limited due to its reluctance to embrace large-scale asset purchases (LSAP). A nominal income target, supported by governance and accountability reforms, would improve monetary policy decision-making by alleviating the knowledge problems faced by policymakers. The paper also shows how public policy could support a nominal GDP (NGDP) futures market to better inform monetary policy decisions.