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A Tale Of Two Terms-Of-Trade Booms - Address by David Gruen


Wednesday, 1 March 2006

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This presentation was made by David Gruen to the Australian Industry Group, Economy 2006 Forum, Melbourne on 1 March 2006.

The response of the economy to the current terms of trade boom is compared to its response to the comparably sized boom of the early 1970s. Across a range of dimensions, there are stark differences in the economy's response to the two booms. The speech argues that the current macroeconomic institutional arrangements -- with a market-determined exchange rate, a credible medium-term inflation targeting regime implemented by the Reserve Bank, and more decentralised wage-setting arrangements -- have a lot to do with the improved macroeconomic performance this time around. An implication of these current institutional arrangements, however, is that the market-determined exchange rate imposes significant restraint on those export and import-competing sectors, including parts of the manufacturing sector, which are not experiencing strongly rising prices for their output or are not directly exposed to the booming sectors of the economy.

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