of maximum “ go ”, and heavy braking. this is a reading of the framework we do not share. there is a range of settings of the instrument between “ maximum go ” and “ heavy braking ”. most of the time we would expect interest rates to be in that range. let us look at two possible situations where monetary policy should be changed : • the first is when inflation is above the target. in this situation, the inflation targeting framework would say to raise interest rates to a setting which would bring inflation back to the target. but once the higher rates had done their job, they should be gradually reduced to more normal levels. this is what happened in 1996. we did not wait until our forecast had inflation falling below 2 % before we started to ease. • the second is when inflation is below the target. in this case, the framework would call for a setting of interest rates which would, over time, allow inflation to go back up to the target. once it is clear that such a setting had done its job, the framework calls for it to be replaced by one more likely to keep inflation at the target. the framework does not envisage the policy setting being maintained until something goes wrong. now some may object that all this smacks of fine tuning. i agree that we should not delude ourselves that the economy can be precisely controlled so that inflation stays within or close to the band, even when there are no external shocks. the point remains, however, that even if the process is not precise, the instrument does not remain at its most extreme setting once that is no longer needed. as the outlook changes, and as the balance of risks shifts, it is appropriate also for the policy instrument to shift. 3. what about the gst? some people have not been convinced by the arguments i have used above. some still cannot understand why you would tighten unless the economy was overheating, and assume that there must be a hidden agenda. others are keen to play the old game of trying to find a political dimension to monetary policy. this has led some people to say that the real reason is our fear of the inflationary effects of the gst, but that we are too diplomatic to say so. i am sorry to disappoint the proponents of this view, but that is not the case. • if the gst was the reason for tightening monetary policy, why have the fed, the bank of england and the ecb tightened monetary policy?

ian macfarlane : the economy and monetary policy speech by mr ian macfarlane, governor of the reserve bank of australia, to the economic society of australia ( victorian branch ), melbourne, 10 april 2001. * * * introduction it is a pleasure to be here in melbourne speaking to the economic society again at this very interesting time in the evolution of the world economy, the australian economy and our monetary policy. with so much happening, i trust you will find what i have to say about our current economic circumstances and monetary policy of interest. there has certainly been a remarkable change over the past four or five months in virtually everyone ’ s view of the economic outlook. i think the biggest change is at the global level, where forecasts for economic growth in major countries have been lowered. the most important economy, and the one that has been leading this reassessment, is the united states. but japan has relapsed, and the rest of asia is also feeling some chill trade winds. the process of monetary policy easing that began in the united states in early january has now spread to canada, the united kingdom, new zealand, switzerland, japan, many other asian economies, and, of course, australia. the euro area is the exception. in a medium - term sense, we should not be surprised that after such a long global expansion, some aspects of the business cycle are reasserting themselves, or that developments in the us economy are playing such a leading role and attracting so much attention. as always, the evolution of the international business cycle and international financial markets has a major bearing on economic developments in australia and therefore for australian monetary policy. but there have been some very unusual developments in australia which call for explanation, and which also have had implications for our monetary policy. before returning to the bigger picture, i would like to spend some time on these unusual developments. output developments in australia i have frequently said that under the inflation targeting approach to monetary policy, our aim was to maximise the length of the economic expansion and, as a corollary, to delay and minimise the severity of any downturn. over the past decade, monetary policy, helped by other policies, has been relatively successful in this endeavour in that the current expansion has been longer than its predecessors in the 1970s and the 1980s. and when i last spoke publicly on this subject towards the end of last year, i expected this state of affairs to continue. like virtually everyone else who follows economic developments in australia