Credible disinflation : an incredible prospect? Australia in the 1980s : a case study

The object of this thesis is to consider whether, over the period of the 1980s, government inflation credibility had improved. This analysis is carried out in as much as some comment can be made on the costs of disinflation. The notion of credibility argues that credible disinflation policies will yield quick and relatively costless disinflation. The empirical analysis suggests that credibility did improve over the period of the Hawke Government. The ACCORD and reputation augmented monetary policy are posited as the rationale for this. The evidence of high transitional costs of disinflation appear, though, to contradict the findings of the empirical work. However, this paradox' is resolved by an analysis of the aetiological nature of Australia's recent inflation experience. The finding of this study contradicts the conventionally held view that wages are the major determinant of inflation. This paper posits the asset price spiral of the late 1980s as being the major determinant of recent Australian inflation. This, it is argued, resolves the paradox.