A Land Locked into Low Inflation - How Far is the Promised Land?

Since the mid-1970s, inflation has been identified as the number one macroeconomic problem in Australia, and "fight inflation first" has become the cornerstone of macroeconomic policy mix. The present government has come close to the NZ stance of having legislated a "zero or low" inflation target for the Reserve Bank. This policy stance has been largely successful in bringing both actual and expected inflation down. The fight against inflation has obviously left many casualties - the unemployed. There will, however, be a net gain if the promised productivity growth eventuates. This paper finds that the promised relationship between inflation and productivity growth is either missing or fragile.