march 1983 federal election, markets were anxious about the prospect of a change of government. in the week prior to the election, capital outflow amounted to about 3 per cent of the total money stock, or about 1½ per cent of australia ’ s annual gdp. this occurred in spite of capital controls that were still in place, because the distinction between current and capital transactions was blurring and market participants were becoming more adept at circumventing the controls. exporters were by then skilled at delaying receipts when a devaluation was anticipated, while importers accelerated their payments, as did those servicing foreign currency debt. these swings caused operational difficulties in maintaining suitable conditions in the money market. as for achieving the target for m3 growth, i can well recall, as one involved in forecasting growth of the ‘ money supply ’ in those days, the impossibility of forecasting the size and the persistence of the capital flows, which were one of the major drivers of the growth in the community ’ s monetary assets. the newly elected labor government responded to the crisis by devaluing the australian dollar by 10 per cent against the twi. this was successful in reversing the flow of funds and generating capital inflow, as exporters, for example, brought onshore their pent - up receipts. but the problems were far from solved. later in 1983, australia ’ s external position was improving, due to a post - drought recovery in the rural sector, rising commodity prices and higher demand for mineral exports. the volume of capital inflow gradually mounted, further encouraged by australia ’ s positive interest differential with the major countries. this again caused problems for monetary policy as the reserve bank had difficulty withdrawing the resulting increase in cash in the banking system. the plan that was devised to counter these problems was one of a gradual appreciation of the exchange rate ( achieved through adjustment of the daily fix ), lower short - term interest rates but increased sales of government securities to fund the fiscal deficit, which was likely to see longer - term yields increase. that is, it was thought that currency speculators would be deterred by the very low short - term rates, notwithstanding the higher yields on offer at the longer end. this would help achieve the m3 target by reducing the liquidity resulting from capital inflow. the exchange rate management committee also sought to add a random element to the daily movements in the exchange rate, around the general trend appreciation, to reduce the predictability in the movements in the

for consumer price index ( cpi ) inflation from the survey of professional forecasters ticked up in february, this measure remained at essentially the same value that has prevailed since 1998. as for inflation compensation derived from spreads between yields on nominal and inflationindexed treasury securities ( known as treasury inflation - protected securities, or tips ), the implied rate of inflation compensation from five years ahead to ten years ahead ( the socalled five - to - ten - year - forward rate ) has risen somewhat since the beginning of the year. does this rise in forward inflation compensation indicate that long - run inflation expectations have risen by a similar amount? my best guess is that much of the rise in inflation compensation reflects other factors. to begin, recall that inflation compensation measured by using tips yields is not the same thing as inflation expectations. rather, movements in inflation compensation reflect not only changes in inflation expectations, but also changes in an inflation risk premium and in the relative liquidity of tips and similar maturity nominal treasuries. 3 to see that these components are distinct, recall that during the period of heightened concerns about deflation in 2003 and 2004, forward inflation compensation rose substantially to an unusually high level amid concerns about an unwelcome fall in inflation ; that earlier episode, in particular, underscores the fact that we must be careful in using the forward rates of inflation compensation as a gauge of long - run inflation expectations. to see this distinction another way, consider a scenario in which inflation uncertainty increased but inflation expectations for additional background, see gurkaynak, sack, and wright ( 2008 ). they discuss the decomposition of inflation compensation into these distinct components and argue that far - forward rates of inflation compensation are too volatile to be pure measures of long - run inflation expectations. did not. in that case, the midpoint of inflation expectations would remain the same, but the range around the midpoint would increase. turning specifically to the recent experience, consider the sequence of one - year - forward rates of inflation compensation – that is, decompose ten - year inflation compensation into a sequence of one - year - forward rates. the one - year - forward rate ending about five years from now has moved up, but the forward rate ending in ten years has climbed more than twice as much. this pattern suggests an important role for factors other than rising long - run inflation expectations in explaining recent movements in inflation compensation as one might suppose that any tendency toward higher inflation would be expected to show through within five