New monetary trilemma?

The Economist looks at an interesting issue in The low rate conundrum:

LONGER-TERM interest rates have been low for quite some time now across much of the rich world, and there is little sign of an upturn any time soon. This is disconcerting. As Ben Bernanke put it in an interesting speech delivered Friday, there are two reasons to worry about low long-term rates: that they'll rise and that they won't. As rates remain low, financial market participants may be encouraged to "reach for yield", by taking dangerous risks and leveraging up. Alternatively, if rates rise sharply then there could be large financial losses in the system. As Mr Bernanke notes, the two risks are mutually reinforcing; reach-for-yield behaviour may increase exposure to losses in a rising-rate world.

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But we should also anticipate that longer-run real growth rates may be higher given higher inflation. Why? Because we have learned that the odds of hitting the ZLB at low-inflation rates are greater than many anticipated prior to the crisis. And because we have learned that the Fed systematically under-responds to demand shortfalls when stuck at the ZLB, because it has concerns about the risks of unconventional policy. Higher inflation therefore implies fewer, shallower recessions and faster recoveries.

It is perhaps premature to declare the existence of a new monetary trilemma, that over the medium-term central banks can choose at most two of the following: low inflation, low unemployment, and financial stability.

How the RBA maintains the cash rate

In an address to the University of Adelaide Business School (In The Reserve Bank's Operations in Financial Markets) Guy Debelle, Assistant Governor (Financial Markets) of the Reserve Bank of Australia, explained how the RBA sets interest rates and deals with exchange rates:

I will talk about how the Reserve Bank actually implements the target interest rate set by the Reserve Bank Board at its monthly meetings. I will then describe how this interest rate, known as the cash rate, affects all the other interest rates in the economy, including mortgage rates, business borrowing rates and deposit rates. So that affects you one way or another.

I will also talk about the Reserve Bank's transactions in the foreign exchange market and finish with some thoughts about the exchange rate more generally.