Implementation of the Reserve Bank of Australia's inflation target and the impact of Covid-19: an assessment

Peter Docherty

Chapter 2 in Central Banking and Monetary Policy Implementation, 2025, pp 26-64 from Edward Elgar Publishing

Abstract: This chapter outlines the corridor system within which Australia's inflation targeting approach to monetary policy has until recently been implemented, and explains how that system changed in response to the onset of the Covid-19 pandemic. It develops a model of the interbank rate in which the demand for liquidity is a function of “autonomous” liquidity factors and the interest rate on interbank loans, and the supply of liquidity is endogenous. It shows how the Australian corridor system ensures that the interbank rate falls between the rates on the Reserve Bank of Australia's (RBA’s) two standing facilities, but how market operations deliver a rate that hits the RBA's target, determined within the inflation targeting regime, with a high degree of precision. The chapter also considers the impact of unconventional monetary policies introduced in response to the onset of Covid-19 in 2020. It argues that these policies created a contradiction between the specification of a target for the interbank rate and the objective of flooding the cash market with liquidity to flatten the yield curve and support bank lending. It shows how this contradiction was resolved by the RBA's de facto acceptance of a floor system rather than the previous corridor system. Finally, the chapter evaluates this new system from a post-Keynesian perspective.

Keywords: Monetary policy; Interbank rate; Inflation targeting; Corridor system; Floor system; Endogenous money (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035302796
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