留學生貨幣金融學dissertationMonetary Policy of the RBA on High Inflation
Executive Summary

 Keynes suggests that moderate inflation is beneficial to stimulate consumption and investment, boast economy growth, as well as promote employment. Contrarily, high inflation may impose a number of negative effects on economy, which worths being concerned by people. The Reserve Bank's revised forecasts are for inflation to hold above the top of the 2-to-3% band for more than two years. Even by June 2010, the expectation is only that inflation will be back at 3%, the top of the target band (Statement on Monetary Policy 2009). With the inflation becoming more concerning, the Reserve Bank is taking many crucial measures to ensure it controlled in a moderate rate.

 Introduction

  Inflation means that money supply exceeds the actual money demand, generating a sustained increase in the general level of prices over a period of time whose essence is the total demand of society greater than the total supply. Inflation can not be anticipated while its generation, without any doubt, will bring about a series of influences, both positive and negative. High inflation rate, out banks’ control, is dangerous for one country’s economy. This paper represents many serious effects of high inflation and measures taken by Reserve Banks.

 Analysis

 Negative effects of high inflation

  The value of money decrease, including money depositing in banks where inflation may lead too high interest rates and fail to protect the purchasing power. As a result, this effect perhaps stimulates people to seek a higher wage or social position to follow the purchasing power of their nominal wages which in turn imposes much pressure on the economy running efficiently, blocking the progress of economy development finally.

  During a period of low inflation, if one kind of goods’ price goes up, purchasers and sellers can clearly realize an actual change between supply and demand, an immoderate and quick response being taken. On the contrary, being in high inflation, it is difficult to identify the changes between relative price and general price. By the monthly inflation rising to 20% or 30%, shop owners will change prices frequently, with an unavoidable result of the relative price being in disorder and inadaptable.       

 Additionally, the level of unemployment and inflation closely related. On one hand, demand-driven inflation, under certain condition, can promote manufactures expanding production scale, increasing employments; on the other hand, inflation decreases the effective rate of interest which will stimulates the demand of consumption and investment, as well as boost the fullest use of resources and the growth of total supply. However, with the declining of supply, inflation emerges, national income and the quantity of employment also beginning to decrease which in  turn, causes most workers unemployed. Finally, sustained inflation will produce larger unemployment which induces worse inflation again if without effective measures to prevent.#p#分頁標題#e#

 In conclusion, high inflation can generate many detriments, such as rising prices, weakening people’s purchasing power, influencing consumption and productivity of company. Therefore, to maintain a healthy and steady growth in economy, one country should pay high attention on the inflation and take possible and effective measures to keep a moderate inflation

Measures taken by Reserve Banks

“Another important influence on the economy which is often put under the heading of monetary policy is the level of the exchange rate.” (Recent Influences on the Exchange Rate Melbourne, 9 November 2000.) The main policy to sustain low inflation depends on monetary policy which presents some measures taken by Central Banks to affect economy activities, especially steps to control money supply and regulate interest rates whose final objectives are to maintain particular policy targets, such as restraining inflation, achieving complete employment or boasting economy growth. The Reserve Bank of Australian (RBA) takes charge of implementing monetary policy, providing financial service for the government, preserving international balance of payment. For recent 20years, the RBM has renewed some system tools and trade arrangements (e.g. expanding domestic securities), guaranteeing the executive tools of monetary policy keeping pace with the market which goes down to the present, enforcing the monetary policy efficiently.

  By now, the RBA has accomplished two achievements, one is to regulate surplus and deficiency of foreign exchange as well as solve the problem of insufficient foreign exchange confronting the government; the other is to reestablish currency reserves, for money intervening lead currency shortage in 1997-2001.Since last year, continuous revaluation of Euro has provided profitable external environment.

   Domestic market operation

 The main policy targets of the RBA is formulating and implementing the rate of official cash. The RBA is also responsible for the consistence between unofficial effective rate of interest and official cash. Unofficial cash depends on the overall condition of commercial bank clearing account in the RBA, namely balance of payments. The RAB need make sure the channel of cleared founds smooth, so official cash should suit for the normal trades of commercial banks in the financial market. Besides, during currency exchange, the Reserve Bank adds amount on the clearing account of commercial banks, supporting swapping dealing of Euro between commercial banks to promote economy activities.

 In addition, the RBA decides to expand the scope of certificated securities, especially emphasizing on operation to the   domestic securities, instead of relying on foreign change conversion and futures to safeguard the market balance. This decision increases the degree of price openness and also decreases prices crises at the same time. Through these crucial monetary policies, the RBA maintain a moderate inflation, economy enjoying a steady growth.#p#分頁標題#e#

  Foreign exchange transactions

 The RBA also acts an essential role in foreign exchange transactions, whose most important management function is managing the exchange rate of Euro in the foreign exchange market by intervention policy mainly. When there existing extinct difference between the exchange rate and the long-term average, it is difficult to solve the high inflation only relying on economy development driven. At this time, the RBA must undertake the responsibility of regulating and managing daily cash flow through applying futures in foreign exchange actions.

Conclusion

High inflation is an essential issue to economy development, which will constrain economy activities largely without an effective regulation and control. According to the stagnant economy development in current international situation, it is making more serious challenges and difficulties for the growth of the Australian economy. The monetary policy brought by the RBA is setting to a positive position to stimulate the economy in Australia, also imposing crucial effect on controlling high inflation.  

 留學生貨幣金融學dissertationReferences

 John Maynard Keynes, 1st Baron Keynes (5 June 1883 – 21 April 1946) was a British economist whose ideas have been a central influence on modern macroeconomics, both in theory and practice.

The RBA: Statement on Monetary Policy was finalized on 6 August 2009 and released on 7 August 2009.
Melbourne, 9 November 2000, Recent Influences on the Exchange Rate, Address to CEDA Annual General Meeting Dinner.