The Reserve Bank of Australia has been widely criticised for its conduct of monetary policy over the past two years. Some of that criticism is misplaced. Yes, the bank’s inflation forecasts were far too low, but the bond market’s forecasts were not much different.

Nor should the RBA be heavily criticised for being slow to respond to rising inflation. In the face of powerful long-term deflationary forces, such as those now in the global economy, it is a mistake to tighten monetary policy too early when short-term inflationary pressures emerge. The work of Milton Friedman and his acolyte Ben Bernanke explained why.