of rule be employed? the 1970s and early 1980s provided important real data and experience in the resolution of these questions. friedman and phelps had already long argued that there was no long - run trade - off and that attempts to reduce unemployment below some structural level by accepting higher inflation would simply result in accelerating inflation and no lasting gain on unemployment. the 1970s seemed to demonstrate that this was right. more strident derivatives of the chicago tradition, however, which insisted that there was not even any short - term trade - off, were found to be wide of the mark. money did seem to matter, since the big rise in inflation in the 1970s had been preceded by a large increase in money growth. a lot of people not only accepted that monetary quantities were the key thing to look at, but concluded that central banks had failed to control them, so that some sort of step away from unconstrained discretion towards monetary rules was advisable. as a result, targets for those quantities were adopted, including in australia. that was the language of discussion when i was a student and when i first started work at the reserve bank in 1980. 1 these days, we have inflation targeting, an arrangement that provides a measure of constrained discretion to the central bank within a medium - term framework. it emphasises the control of inflation over time, but does not seek to fine - tune inflation over short periods. that allows a reasonable accommodation for trends in economic activity and employment over periods of a year or two, about which the reserve bank is required to have concern by its charter as well as by common sense, but preserves the value of the currency over the long run. in the language of trade - offs, this system accepts there is a short - term growth / inflation trade - off, but also accepts there is no long - term one. inflation targeting does not ignore financial quantities, but does not elevate them to the status of an intermediate target and does not see them as an instrument. inflation targeting is not perfect and, on occasion, still leaves policy - makers with some quite difficult decisions to make. it is, however, the best system that has been devised as yet. the fiscal debate of the 1970s was dominated by the budget deficits of the period, and the need to reduce them. on contemporary figuring, the commonwealth ’ s budget deficit reached about 4 - 5 per cent of gdp in the middle years of the decade. using figures comparable to those in use today, which measure the underlying cash

i would like to say a little more about it today and will divide the subject into two aspects : the shorter - term cyclical fluctuations in household credit growth, and the fact that various debt ratios have trended upwards over time. regarding the first of these issues, the most recent cyclical peak in household credit growth occurred around the end of 2003, when it reached an annual rate of over 20 per cent. since the bulk of household borrowing is housing - related, it is not surprising that this phenomenon was closely associated with a sharp run - up in house prices. nationwide house prices increased strongly for several years up to late 2003, reaching a peak growth rate of around 20 per cent in that year. the increases in credit and house prices were inter - related, with credit availability fuelling the price rises, while rising house prices meant people had to borrow larger amounts to achieve home ownership. much of this behaviour was driven by expectations, particularly in the investor market, of future price gains – the classic definition of bubble - like behaviour. in the period since late 2003, both the housing market and the demand for credit have cooled. nationwide house prices have been broadly flat over the past two years and prices have fallen in sydney. household credit growth has eased back to an annual rate of around 12 per cent. although this might still be regarded as quite high in absolute terms, it is towards the lower end of the range in which it has fluctuated in the past two decades. while there are some tentative signs that credit and housing market conditions have firmed a little in recent months, the risks to the economy posed by the over - heating in housing and credit markets in the period up to late 2003 have eased. households now seem to have entered a period of greater financial caution, and this may act as a restraining influence on the growth of household spending for a while to come. the second issue is the high average growth rate of household credit over an extended period. this is a longer - run issue and one on which it is more difficult to make firm judgments. for more than a decade, household indebtedness has grown at a rate well in excess of the growth in household incomes. this has meant that the aggregate ratio of household debt to household income has trended upwards, as has the proportion of household income required to service the debt, and the gearing ratio ( debt to value of household assets ). simple rules of thumb would suggest that this cannot be sustained indefinitely. yet there are a number