Operating monetary policy

I know this is not a subject anyone is studying at this point in the year, but Ross Gittins outlines how monetary policy works in today's Age.

Exactly how the Reserve Bank of Australia (RBA) controls interest rates is something you have to understand in Unit 4. Australia does this in a similar way to other countries, but has its own precise way of doing it.

Ross Gittins can write some really useful stuff and following his column is a good idea. (However sometimes he seems to get it off the back of a cereal packet so be careful!)

I have one argument with Gittins assertion that the RBA is in control of interest rates. His analysis works for Australia, so far. If he was talking about the UK or the Euro Area, for example, then it would have to be conceded that the market rate can diverge from the 'official rate'.

This happens because funds move between financial markets as banks operate across borders. Australia is a small and isolated market, but it becomes less isolated everyday and before long international banks will be operating alongside the high street banks you know well. But not before you do your exams.

Gittins explains how monetary policy works here