Eds: Reissuing to change keyword from ke RBA: EDEY to ke RBA: DEBELLE.
By Garry Shilson-Josling, AAP Economist
SYDNEY, Nov 11 AAP - Reserve Bank of Australia assistant governor Guy Debelle has taken a swipe at the United States for the problems ultra-loose monetary policy in the US is causing countries like Australia.
The remarks, partially reported in the press on Friday, were published on the RBA's web site on Monday afternoon.
They were part of a critique of a paper presented at an International Monetary Fund conference in Washington on Friday.
Dr Debelle gave a hypothetical example of a country whose exchange rate deviated from "the real fundamentals" because of financial factors.
"How can that come about?" he said.
"Well let's think of a country, which I'll call the Usual Suspect or US for short."
An "extremely expansionist monetary policy" - as the US has, with near-zero interest rates and dramatic expansion in banking system reserves - might be "completely justifiable from its perspective," he said.
But it affects the rest of the world, as the exchange rates of other countries are pushed up by capital inflows searching for higher yields.
"In Australia's case, an exchange rate appreciation that is not in line with the fundamentals, if persistent enough, can lead to Dutch Disease," he said.
The Dutch disease is the normal effect of a commodity price boom for commodity-exporting countries like Australia - a persistently high exchange rate eroding competitiveness and "hollowing out" non-resource industries.
Dr Debelle was saying that the low interest policy in the "US" could have the same effect, without the commodity price boom.
Australia has recently experienced both effects at once, which helps explain why interest rates have had to be set so low and why, despite that, the trend in employment is currently falling.
Dr Debelle challenged the idea that what's good for the US is good for everyone.
"But, you might say, isn't a stronger US economy good for the rest of the world?" he said.
"Or in other words, 'suck it up sunshine'."
That may be true for the world in general but not necessarily for every country, he said.
There were two effects at work.
One is the income effect, with faster growth in spending in the US boosting growth in other countries.
The other is the substitution effect, the adverse impact on economic growth from the higher exchange rate, a problem familiar to large sections of Australian industry.
The substitution effect can outweigh the income effect, he said, especially if capital flows are large and trade with the US is relatively small.
These capital inflows have "posed an interesting conundrum in Australia in recent years", Dr Debelle said.
"We have been experiencing a 'boom with gloom'."
"We have had the difficult balancing act of trying to tell foreigners that the economy is not as good as they think it is, so stop sending us so much capital, while at the same time trying to convince the locals that the economy is not as bad as they think it is."
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