Debt, Credit and Monetary Targeting in Australia*

Abstract

The purpose of this paper is to examine the case for debt targeting in Australia. This issue has recently attracted considerable policy interest, especially in the US, in view of the acceleration and diffusion of new financial products and processes which have tended to undermine the existing monetary aggregates. A series for broad credit (defined as outstanding indebtedness of all non‐financial sectors) is constructed and its behaviour and that of its components is discussed and analyzed. A variety of empirical techniques based upon the predictability criterion are employed to show that, unlike the US, no case can be made to support the use of broad credit as an intermediate target in Australia. Bank credit and M3 are found to perform reasonably well as intermediate targets.

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