Introduction
Macroeconomics deals with the study of aggregate indicators of the economy. They include gross domestic product, unemployment rates, inflation and price indices. Macroeconomics is understood through the development of models that simplify the workings of the economy. Output, inflation, savings, national income, economic output, investment, internal and external finance and trade are some of the models used in the study of macroeconomics. Capitalist economies operate in cycles like depressions, recessions, recoveries and economic growth, that are heavily shaped by macroeconomic policies. Stabilization of the economies is achieved through adjustment of macroeconomic climate through monetary and fiscal policies.
Fiscal policies
The fiscal policies basically involve the influence the government exerts on the economy through taxation and spending policies. The fiscal decisions yield balanced budgets, deficits or surpluses. When governments want to stimulate growth, they employ expansionary fiscal policies like introduction of stimulus packages while contractionary fiscal policies are employed to slow the economy down, limit the current account deficit and limit foreign liabilities. Monetary policies on the other hand involve actions taken by a central bank, in this case the Reserve bank of Australia to influence the cost and availability of money and credit in the economy.
Different countries employ varying approaches in determining the course of macroeconomic policy development. This paper will focus on the macroeconomic policy development in Australia.
Australia
Emergence of unwanted inflation and external current account deficit in the mid 90’s in Australia led to the shift in macroeconomic policy. Controlling inflation to the Reserve Bank of Australia’s target of 2-3% was the main aim. According to the International Monetary Fund, in the annual report of 1989, the RBA identified inflation reduction as the central priority for monetary policy formulation. The inflation rate then was running at 7-8% but was reduced to the targeted 2-3% by mid 1992. Many monetary and fiscal policy moves by the Reserve Bank of Australia have been targeting the maintenance of inflation on the targeted lows. This was with the hope that if inflation is contained, the rest of the economy’s macroeconomic indicators will be well within range that a healthy economy requires.
In recent decades, economic growth, internal and external economic balances were the targets of macroeconomic policy. The main goals as said above was to achieve low inflation rate while maintaining a stable economic growth and limiting the amount of foreign debts and liabilities. According to White (1994, p 2), the policy sought to show up employment, growth and savings in 1988. In 1989, the objectives changed from external balance to growth and employment. Recognizing the effects of international trade cycles, the Australian government put in place strategies to influence demand so as to counter negative economic effects from international trade fluctuations.
Success of the inflation focused macroeconomic policies in Australia is varied. The country’s inflation was kept in control in the years following the adoption of the policy. Australia’s relative GDP growth after the adoption of the policy was higher than that of the period before signifying success of the policy (Singh and IMF 1998). Further, Singh & IMF asserts that the variability of the real GDP of Australia was lower compared to the period before the adoption of the target. They further allude that though the inflation targeting approach had made a large impact on the Australian economy, it was yet to stand the test of a full business cycle. The cycle came in the form of the global financial crisis in 2008 which proved devastating for the many economies including Australia’s.
However, the decades following the introduction of inflation-targeted approach were characterized by high unemployment and low growth (White 1994). White further says that the fall in inflation was somehow beyond the government target. The approach the Australian government took towards monetary and fiscal policy was therefore seen to have had marginal effect towards the entire Australian economy. The forecasts were not as accurate as they had been presented. The economy performed relatively well in the 88/89 financial year and 89/90 but performed dismally in the subsequent years. The graphs show the outcome against the forecasts of different indicators in the years following introduction of inflation reduction approach.
The Australian government found itself on unfamiliar economic waters following the recent financial crisis. Like many governments, macroeconomic policies had to change to suit the moment and help in showing up the economy, augment growth and clear the effects of the financial crisis (Maddock and Ian 1987). The emphasis placed on inflation by the Australian authorities would only deal with one side of the problems while leaving the rest of the economy vulnerable. The global financial crisis exposed the vulnerability of the inflation-targeted approach of economies such as Australia. Lack of putting in place countercyclical fiscal and monetary policies built into the macroeconomic policy framework proved too costly for the economy hence prompting the government to purse a macroeconomic policy geared towards avoiding a recession.
The financial crisis highlighted the importance of fiscal policy as a macroeconomic tool (Blanchard, et al 2010). Giovani et al adds that this is because monetary policy including credit and quantitative easing had neared their limits and that the state of the economy and nature of the crisis offered limited choices, leaving fiscal policy as the most effective. Another reason why macroeconomists turned to fiscal policy to ease the effects of the financial crisis was because no one could predict the time the crisis was expected to last. Fiscal policy therefore offered the best shot of providing enough time to yield the beneficial impact withstanding implementation lags.
The government of Australia introduced a stimulus in 2008-09 to counter the effects of the global financial crisis. The stimulus which involved various cash transfers to selected groups and increased spending expenditure on various projects was credited to have shielded Australia from most of the effects that other countries experienced (Makin 2010). The stimuli were bound to lower interest rates and increase the inflation, which worked against the main objective of low inflation by RBA.
Instruments and Targets
Every government lays down policies that stabilize their economies. The goal is normally to achieve stable indicators regarding major macroeconomic issues. These issues include growth and development, employment, business cycles, inflation, budget deficits and fiscal policies, and interest rates and monetary policies. Economic growth and development, employments and economic stability form the basic macroeconomic targets (Ohri, et al n.d).
Nations target growth and development and distribution of the wealth created as a result to improve the wellbeing of its people. They also target the maximum participation of their people in the economy through maintenance of high employment rates. Further, nations targets stability of its growth by minimizing the occurrence of inflationary and deflationary pressures of the economy. On the other hand, fiscal and monetary policies, price and incomes policy and exchange rate policy Form the major instruments in any economy (Ohri, et al n.d). Ohri et al says that these variables are normally under the control of governments despite the prevailing political system.
According to Acocella & Jones, these instruments have selective effects on the macro economy targets, contrary to popular believe that they are universal (2005, p. 16). These instruments are not substitutes to each other rather compliments that are used in tandem with each other. Definition of which instruments to be used, and where is solely at the discretion of the government.
The current policy framework in Australia needs the instruments to keep up the momentum that the economy has after being spared the adverse effects if the global financial crisis. Instead of focusing on controlling inflation alone, policies targeting employments, current account deficit, fiscal policies and budget deficits should also be pursued.
One of the most underused macroeconomic instruments in Australia is the exchange rate. The IMF contends that Australia’s monetary policy rarely responds to the developments of the Australian dollar. The RBA only considers interventionist measures in the exchange rate where market imperfections result in overshooting (IMF 2008). The Fund adds that the interventionist measures are applied only in cases where it is necessary to calm markets and protect it from chaos. Currently the RBA does not see the interventionist approach as an alternative for monetary policy. Active intervention in the exchange market will help boost Australian exports which will greatly reduce the balance of payments deficit.
The RBA should also use extend the expansionary monetary policy by pumping more money to the economy. Through this way unemployment and the effects of recession will be combated. However, this is likely to increase inflation which the RBA has worked to combat in throughout the last decade. On the part of fiscal policy to suit Australia’s situation, the government may introduce tax cuts to boost aggregate demand which in turn will boost other sectors like manufacturing
Use of theory on current macroeconomic policy
Instruments and targets can be used to explains and suit the current macroeconomic policy. The instruments at the governments’ disposal will be employed to alleviate the economic situation that prevails after the global financial crisis. In many countries, there is still painfully high unemployment rates, little or stagnant economic growth, looming threat of another recession, high inflation, budgetary deficit and fiscal policies and unstable interest rates (Nevile 1984). It is important to note that in order to ensure return to recovery of the economy, not all economic targets will be met. Some will be regarded to be more important than others. For instance, to end the recession, macroeconomic policy will focus more on unemployment than it will focus on inflation.
Growth and development
An expansionary monetary policy which has been pursued by many nations including Australia is in order to spur economic growth (Tanner 1999). It is one of the instruments available to monetary organizations in the Australia to keep economic growth on course. In introducing stimulus packages, governments showed up spending on infrastructure projects and transfer payments in order to boost household income and effectively consumption. Investments from the government too do help in the current macroeconomic climate; data suggests that in Australia’s case, government investments did little to stop the effects of the recession.
Employment
The current macroeconomic policy which is largely supported by the stimulus programs has risen infrastructure spending. In the United States for instance, the focus has been directed on major road projects and the development of green energy initiatives. These programs have created many jobs in Australia. With many people working, the authorities hope consumption will go up and help in sustaining the slowly growing economy. It is an example of an expansionary monetary policy that has been used to create jobs in this economic climate.
Inflation
With the current economic climate, inflation is likely to go above the targeted rates of 2-3%. The stimulus package injected money to the economy and the interest rates have been low to encourage people to borrow. Therefore, there is excess liquidity in the market which forms a favorite condition for high inflation (McKenzie 1982). However, some small monetary contractionary policies can be pursued. They include issuance of treasury bills and bonds to mop excess money if it threatens to destabilize prices of commodities. However, anti-inflationary measures have not been aggressively pursued as they are likely to reverse the gains made from the expansionary policies pursued by RBA.
Budgetary deficit and fiscal policy
This is an important part of the macroeconomic policy which helps create an investment friendly economic climate. The money used in the stimulus programs considerably raised budget deficits of many nations. Since the countries could not raise the money from their normal revenue collections, they had to borrow to bridge the gap hence increasing the budget deficit. It’s a necessary macroeconomic fiscal policy tool that the government had to take in order to stem the recession. Tax cuts have been proposed on middles class families that make up majority of the economy. Tax cuts are meant to boost the disposable income of families so that they can increase consumption which is critical to economic growth.
Interest rates and money supply
This involves the interest rates and money supply of money to stimulate the economy. Macroeconomic policy currently is firmly focused on the policy which many economists contend will help kick-start the economy. The stimulus and bail out packages are meant to help increase flow of money into the economy. This therefore is one of the important instruments that can be used. The RBA has kept interest rates low as a way of encouraging more people and business to borrow loans for businesses.
Conclusion
Macroeconomic growth and stability is a wide area and it can never be achieved by ensuring the stability of one indicator only. In Australia’s case, the focus on inflation was not adequate and did little to help the country escape the global financial crisis. In fact, policy makers had to go against the normal to pursue an expansionary monetary policy which actually was bound to increase inflation, in order to save the economy. It is suicidal for any one economy to adopt one-sided approaches in managing the economy. The current economic order is too interconnected and no one economy can survive on its own. The instruments at reserve bank’s disposal should always be used to forecast and stem any negative economic caused by the cyclical economic stages.
References
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McKenzie, I. M. (1982) Essays on the real Exchange Rate, Investments and the current account. Doctoral Thesis, MIT.
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