Wanted to ask about the logic of not going 75. I'd like to take the other side of this.
If the RBA were to hike rates 50bps this month, when the cumulative of additional information suggests a more benign picture for inflation (low wages), it proves they know current policy is clearly wrong. In that case, larger moves earlier might have been appropriate.
On the point about monthly meetings, I would have thought the only benefit of having 11 meetings versus 8 is that it allows you to move more aggressively on occasion. In 90% of years there is no benefit at all because there are few quarters which contain hikes of 100bps. On rare occasions, they let you move faster. If we have 50% more meetings, but we only use clips that are 33% smaller, there's no benefit. I suppose the counterargument would be there's a penalty on hiking too quickly, which makes 150bps per quarter a speed limit that both the fed and the RBA are subject to, so your maximum move is 150 divided by number of meetings per quarter. Is that the underlying reason?
In terms of habit formation, I understand the argument to be that one large cut to consumption hurts utility more than smaller ones that sum to the same amount. But do we really use those models because we think they reflect something about happiness? I have only seen them used because they help explain asset pricing puzzles by generating a high equity risk premium. Is there good reason to believe spreading these budget cuts over 3 months versus 2 is better? People might also prefer receiving bad news twice to thrice.
Great post. Enjoyed it, and many others.
Wanted to ask about the logic of not going 75. I'd like to take the other side of this.
If the RBA were to hike rates 50bps this month, when the cumulative of additional information suggests a more benign picture for inflation (low wages), it proves they know current policy is clearly wrong. In that case, larger moves earlier might have been appropriate.
On the point about monthly meetings, I would have thought the only benefit of having 11 meetings versus 8 is that it allows you to move more aggressively on occasion. In 90% of years there is no benefit at all because there are few quarters which contain hikes of 100bps. On rare occasions, they let you move faster. If we have 50% more meetings, but we only use clips that are 33% smaller, there's no benefit. I suppose the counterargument would be there's a penalty on hiking too quickly, which makes 150bps per quarter a speed limit that both the fed and the RBA are subject to, so your maximum move is 150 divided by number of meetings per quarter. Is that the underlying reason?
In terms of habit formation, I understand the argument to be that one large cut to consumption hurts utility more than smaller ones that sum to the same amount. But do we really use those models because we think they reflect something about happiness? I have only seen them used because they help explain asset pricing puzzles by generating a high equity risk premium. Is there good reason to believe spreading these budget cuts over 3 months versus 2 is better? People might also prefer receiving bad news twice to thrice.