Frank Stafford on a Transmission Mechanism for Australian Monetary Policy

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I wish I new a lot more about different approaches to public policy in other countries. In “Even Central Bankers Need Lessons on the Transmission Mechanism for Negative Interest Rates” I wrote about the importance of the correlation between wealth effects and the marginal propensity to consume of different groups as an important part of the monetary policy transmission mechanism. My colleague Frank Stafford told me an interesting example, writing:

I have been involved with a group in Melbourne that studies the Australian housing market.

On my recent trip I just pieced together an unusual aspect of monetary policy there.

Most Australians own their own home and almost all the mortgages are ARMs.

When the Reserve Bank lowers or raises the ‘cash rate’, there is a prompt reset to the ARM mortgages, with monthly payments falling or rising, accordingly. If the cash flow burden is too difficult they take money from the home’s equity.

No doubt about the 'channel of policy’ but a rather unusual type of 'tax cut’ or 'tax increase’ on a subset of the population.