How Interest Rate Targeting Works

In my previous post on monetary policy transmission asymmetries, I leaned too heavily on the mortgage repayment channel – the "cash-flow" story – when explaining why rate hikes transmit fast. Peter Tulip rightly called this out: the consumption research suggests the cash-flow channel is less important in aggregate than the public discussion implies.

He's right. And it's worth a more detailed treatment, because understanding which channels actually matter – and how much – is essential background for evaluating the alternative instruments people periodically propose for managing inflation.

Monetary Policy: Asymmetries, Lags, and the Case for Purposefulness

Introduction

The textbook story of monetary policy is deceptively simple: raise rates to cool inflation, cut rates to stimulate demand. In practice, the transmission mechanism is neither symmetric nor uniform. Different channels operate at different speeds, rate hikes bite harder and faster than rate cuts heal, and the labour market – the variable central bankers care most about – is the slowest to respond. Understanding this structure explains both why central banks should be deliberate in their actions, and why a rapidly falling unemployment rate during above-band inflation is one of the most worrying signals in macroeconomics.

Where Is the NAIRU? And What Does It Mean for the RBA?

Introduction

The NAIRU – the non-accelerating inflation rate of unemployment – is back at the centre of the Australian monetary policy debate. With the RBA hiking in February and the next meeting in mid-March, the question isn't really about the direction of policy anymore. It's about pace. Should the RBA hike again in March, or wait for the Q1 quarterly data and (depending on that data) act in May?

The answer depends almost entirely on where you think the NAIRU sits.

Is Macroeconomics a Science?

TL;DR

• Macroeconomics is a science - but a fragile, conditional one. It is a social science, not a natural science like physics or chemistry.
• The right test isn't Popper's falsifiability but Lakatos's question: is the dominant research programme generating new, empirically confirmed insights - or just patching failures?
• We should trust macroeconomists on mechanisms and trade-offs, be sceptical of precise forecasts, and be honest about where technical analysis ends and political judgement begins.

Australia's Productivity Problem: A Lost Decade and Why AI Won't Save Us

Australia has a productivity problem. You've heard this before. But the usual story - a gradual slowdown, structural shifts toward services, Baumol's disease - misses what's actually happened.

The real story is starker: Australia had exactly one period of meaningful productivity growth in the last 45 years. It lasted about twelve years. Before and after: stagnation. And since 2015, even the strategies that previously masked this problem have stopped working.

From Phillips to Policy: What Should Anchor the NAIRU?

The Expectations Revolution

The original Phillips Curve is a beautiful empirical regularity: lower unemployment meant higher inflation. Policymakers in the 1960s thought they faced a stable menu of choices - trade off a bit more inflation for a bit less unemployment, or vice versa. The current Phillips curve in respect of Australia looks like this.

Why Did the US Invade Venezuela?

I have been trying to get an understanding of why the US invaded Venezuela. So far I have a bunch of theories, none of which I find compelling.