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Lifting the Cloud of Confusion over Monetary Policy*

Authors


  • *

    Thanks to Bob Rankin, Assistant Governor of the RBA, for his assistance. Of course, any errors remain the responsibility of the authors.

David Reimers, School of Regional Business, La Trobe University, PO Box 199, Bendigo, Victoria 3552, Australia. Email: d.reimers@latrobe.edu.au

Abstract

There is no doubt that the Reserve Bank of Australia (RBA) controls base money, but this paper shows that the RBA does not, and has no need to, target base money in order to re-set the cash rate. The money supply in Australia, including base money, is endogenous. Conceiving base money as an instrument of policy confuses normal smoothing operations with a change in stance.

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