Transcript

TONY EASTLEY: The Treasury Secretary, Ken Henry, has labelled those who question the Reserve Bank's two to three per cent inflation target as seriously misguided and peculiar.

But there are those people who continue to question the use of interest rates to try and tame inflation.

Among them is Columbia University professor, Joseph Stiglitz, a winner of the Nobel prize for economics in 2001, and a former chief economist of the World Bank.

He says both developing and developed countries need to abandon inflation targeting or risk damaging their economies.

Emma Alberici reports

EMMA ALBERICI: Paul Keating often claims that wage restraint and an inflation target of two to three per cent were the socially responsible achievements of his Labor government in the early ‘90s. Bernie Fraser was the Reserve Bank chief then. He sparked a row on financial markets by suggesting at the 2020 Summit that the inflation target should be adjusted

The current Reserve Bank Governor Glenn Stevens as well as fellow board member and Treasury Secretary Ken Henry have over the past week, very loudly disagreed.

John Hewson was in Opposition when Paul Keating introduced inflation targeting. He supported it then and does now, but told Lateline Business he believes it's about time the range was changed to something in the order of three to four per cent.

He said that would take into account the fact that many of the factors driving up prices in Australia are beyond the control of the Reserve Bank.

JOHN HEWSON: It is different today than what it was when that target was set and I don't think you should think that the range doesn't or shouldn't change as the nature of inflation changes, of course it should.

EMMA ALBERICI: There are some that go even further in their arguments against linking monetary policy to specific inflation targets, like Joseph Stiglitz. The Columbia University professor and former senior vice-president of the World Bank who won the Nobel Prize for economics in 2001.

JOSEPH STIGLITZ: The countries that follow inflation targeting are likely to get themselves into trouble.

Most countries today face imported inflation. To think that there is anything Australia can do to dampen global food inflation or global energy inflation is absolutely absurd.

EMMA ALBERICI: Do you accept the argument from our Treasury Secretary Ken Henry that inflation targeting of between two and three per cent has been a significant contributor to Australia's economic prosperity?

JOSEPH STIGLITZ: No, I think that one of the major reasons for Australia's economic prosperity are high commodity prices. Australia has been lucky about some of the things that it is exporting have gone up in price, and it would have taken a very bad mismanagement of the economy not to be doing very well under those circumstances.

EMMA ALBERICI: People who are advocates of inflation targeting point to the 1970s when Japan and Germany had such a strategy, and indeed were able to cope with the oil shocks that were evident then, much better than countries like Australia.

JOSEPH STIGLITZ: In the late ‘70s, early ‘80s, there was a fad among central bankers called monetarism. There was no economic theory behind monetarism. It was not supported either by sound economic theory or empirical evidence. It worked in some countries. It was a disaster for other countries.

Today, almost no-one is an advocate of monetarism. Today central bankers are following a new religion - that is inflation targeting. It works sometimes but it doesn't work at others. They'll cite the cases where it has worked and they'll say look at how … the success cases.

I think we are about to see a number of instances of countries that follow inflation targeting in an inappropriate situation and they will be a disaster. And I would predict that in five years time, inflation targeting will be seen as just another fad, fashionable among central banks like monetarism, it will be pushed aside and central bankers will be looking for a new fad to follow.

TONY EASTLEY: American economist and Nobel Prize winner, Joseph Stiglitz, ending Emma Alberici's report.