Macroeconomic Policy for Recovery

Abstract

The major economic problem from which Australia suffers at the present time is an excessively—high rate of unemployment. Australia also appears to have, at present, an excessively—low rate of saving. In contrast to the views of the “minimalists”, who argue that government macroeconomic policy should not be adjusted to offset high rates of unemployment, it is argued in this paper that a policy for recovery is desirable. This argument is based on empirical evidence which suggests that the degree of price flexibility required for the economy to return automatically to full employment does not exist. The appropriate policy for recovery, given the low rate of saving, is an expansionary monetary policy. Indicators of monetary policy do suggest that the current stance of monetary policy is indeed expansionary. It is difficult to say whether an even more expansionary monetary policy should be adopted.