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How Should Macroeconomic Policy Respond to Foreign Financial Crises?

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  • Anthony J. Makin

Abstract

This paper examines the impact of global financial crises on the Australian economy and how monetary and fiscal policy may be used to manage economic downturns that result. To do so, it presents a straightforward analytical framework incorporating financial wealth, exchange rate expectations, foreign demand and interest rate risk to analyse the key role played by the nominal exchange rate in insulating national income from the worst effects of foreign financial crises. In the event the economy is not fully insulated by exchange rate depreciation, it shows that, in principle, monetary policy is a superior instrument to fiscal stimulus for restoring aggregate demand to the full employment level. Since monetary policy is not handicapped by numerous problems that render fiscal stimulus less effective, it should normally be considered a sufficient instrument on its own. Copyright (c) 2010 The Economic Society of Australia.

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File URL: https://www120.secure.griffith.edu.au/research/items/ae76cf16-7aa0-bc30-663b-1df32a2276d4/1/2010-06-how-should-macroeconomic-policy-respond-to-foreign-financial-crises.pdf
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Bibliographic Info

Paper provided by Griffith University, Department of Accounting, Finance and Economics in its series Discussion Papers in Economics with number economics:201006.

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Date of creation: Jun 2010
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Handle: RePEc:gri:epaper:economics:201006

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Keywords: Global financial crisis; National income; Exchange rate; Monetary policy; Fiscal stimulus;

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Cited by:
  1. Chowdhury, Khorshed, 2012. "Modelling the dynamics, structural breaks and the determinants of the real exchange rate of Australia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 343-358.
  2. Tony McDonald & Steven Morling, 2011. "The Australian economy and the global downturn, Part 1: Reasons for resilience," Economic Roundup, Treasury, Australian Government, issue 2, pages 1-31, September.
  3. Khorshed Chowdhury, 2011. "Dynamics, Structural Breaks and the Determinants of the Real Exchange Rate of Australia," Economics Working Papers wp11-11, School of Economics, University of Wollongong, NSW, Australia.

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