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The RBA says the role of monetary policy could be widened and used to avoid damaging price bubbles in housing and share markets.
Speaking yesterday at a conference in Kuala Lumpur, Glenn Stevens, RBA governor, said the international crisis had once again raised the need to examine how monetary policy could be used to avoid price booms spiralling out of control.
While the credit crisis has diminished the appetite for risk and debt Mr Stevens warned that it would “periodically recur” and policy makers should “keep that very much in view in the future”.
“We need policies that can be effective on the assumption that private financial systems are periodically prone to ‘irrational exuberance’...” Mr Stevens said.
“We need policies that steer away from a retreat to the financial repression of the 1940s and 1950s but that have a more sceptical view of the latest financial innovations, and in particular maintain a much greater degree of distrust of leverage in all its forms.
“And we need a system that is more robust in the face of occasional financial failures.”
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