GSFM adviser Stephen Miller writes for the Australian Financial Review:
There is an emerging global consensus that monetary policy is exhausted and that other arms of policy – notably fiscal policy – may need to be deployed should any downturn gather momentum.
That consensus applies in a local context (despite some Canberra holdouts) and persists despite a now growing realisation that the RBA has war-gamed an Antipodean version of quantitative easing (QE).
Monetary policy works through lower interest rates. Whether conventional or unconventional, a lowering of the cost of financing consumption or investment leads to the stimulation of demand.
However, if the economy is in a ‘liquidity trap’ situation so that the scope for privately determined interest rates to fall is limited, then monetary policy can be rendered largely ineffective. That circumstance almost certainly applies in Europe and Japan, and now with a third ‘mid-cycle’ cut in rates the Fed might be argued to be approaching that lower bound.
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