worse, more room for manoeuvre. the old world of “ stop / start ” did not have much to recommend it, but nor did the world of the late 1980s, where an asset boom developed a big head of steam and inevitably was damaging when it came to an end. the floating exchange rate probably allows expansions to last longer, but does not ensure that they end gently. graph 1 : graph 2 : this history makes us look for a degree of caution in policy - making, aiming for longer, gentler phases in the cycle. there is nothing in the historical patterns of the cycle which suggests that they have a pendulum - like determinancy. on the contrary, the variation in length and amplitude ( contrast, for example, 1986 with 1982 or 1990 : see also graph 2 ) would suggest that the shape of the cycle is not at all regular and pre - determined. while it may be possible to explain cycles in terms of “ a stochastically disturbed difference equation of very low order ” ( lucas 1977 ), the true causes seem less mechanical than this might imply, particularly if the implication is that cycles are unaffected by and unresponsive to policy. graph 1 shows the combined effect. this effect was noted, in the early 1960s, by burge cameron. has greater integration and a flexible exchange rate made this effect stronger over time? there was a fair bit of exchange rate flexibility in the 1970s, so the proper comparison may need to go back earlier. the hope is that the upswing which has been underway since 1991 can go for quite some time yet. this may well require it to travel at a sedate pace at certain stages during the expansion, and we have certainly witnessed this over the past two years or so. but this seems far preferable to an economy which is running clearly too fast and has to be brought to a sudden halt. while it is true that the economy might well have grown a bit faster over the past two years without this igniting inflationary pressures, the one factor that most economists agree on is that monetary policy cannot fine - tune the cycle. let me develop this idea by looking in detail at the 1994 experience. the starting point here was an economy which began to grow too fast, with demand growing at 7 per cent in the year to the september quarter, and excessive wage demands. the bank judged that this would produce inflationary pressures, and so raised interest rates three times in relatively quick succession in the second half of 1994

was a realistic hope that the clear enunciation of a target for prices would stabilise price expectations. it would have to be said that the experience of the last decade would suggest that expectations are to a very large degree backward - looking. central banks give prominence to their price stability objective in an attempt to influence price blinder ( 1997, p. 13 ) describes this as : “ one place where academic economists have been barking loudly up the wrong tree ”. expectations in this way, and it seems sensible for them to do so. but it would be a mistake to think that there is a big dividend waiting to be reaped here. whether the lags in recognition and implementation are so long as to make the operation of monetary policy perverse in relation to the business cycle is something that can be established only empirically. like most empirical matters, there is room for considerable difference of opinion. while the lags seem to be ( as friedman promised ) “ long and variable ”, a policy which leans against the business cycle with a view to containing demand - driven inflation will generally affect activity beneficially rather than perversely. 4 at the other end of the spectrum is the view that “ central bank manipulation of financial variables has seemingly exaggerated, not smoothed, economic fluctuations ” ( makin 1993, p. 12 ). one problem in this sort of assessment is that we do not know the counter - factual. what we do know, however, is that cycles are endemic to all economies. so the counter - factual is not straight - line growth. we know, too, that australia ’ s cycles are broadly the same as those in other similar countries. in a world where cycles are universal and endemic, it is easy to blame the authorities for the failure of the economy to proceed along a steady path, perfectly aligned with trend growth. as the upswing accelerates, policy is tightened : it is then blamed for being too slow to react. when the inevitable downturn comes, the firm policies that are in place at that time are pronounced “ guilty by association ”. the appropriate counter - factual should specify an alternative policy regime, and compare the performance under this rule. 5 one relevant issue here is : how strong are the “ self - righting ” forces which tend to take unemployment back towards its natural rate? if these are strong, the case for an activity component in policy - making is weaker. to put this more specifically, will the in - built stabilising forces operate