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Macroeconomic Policy Bachelor - Essay Example

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Macroeconomic Policy Bachelor

Throughout most of the reform period, fiscal policy was reasonably conservative. The Australian Labor administration inherited a large fiscal deficit in 1982/3, in consequence partly of a severe recession. The government proceeded to reduce this deficit progressively through the decade. By 1987/8 a modest surplus had been achieved, and was maintained for the next three years, before another serious recession forced a change in policy. For a short period, also, the administration reversed the post-war trend towards an ever-larger government presence in the economy. Economic growth remained quite buoyant during this period, although inflation continued to exceed that of major trading partners, while remaining below 10 per cent after 1983. The recession of the early 1990s was the major mistake in macro-economic management over this period. Extremely tight monetary policy resulted in a 'hard landing', with reductions in per capita income for two years and unemployment rates in excess of 10 per cent. Inflation did, however, fall sharply. After several years of low inflation, there is now some prospect that inflationary expectations have been eradicated and that low inflation may be a durable policy achievement (Dunning 1999).
In the newly liberal commerci...
lization, the opening of the international capital account, altered the commercial and economic management rules of the game rapidly, and for both governments and financial institutions the new environment has posed great challenges. Firms' commercial horizons broadened immeasurably, as we shall see shortly, and there was a flurry of aggressive highly leveraged international expansion. But financial institutions were rather slow to adjust to the changes. Less than a decade after the liberalization, many of the country's most prominent business conglomerates had collapsed, and several major banks were in great financial difficulty (Sykes 1994).
Liberalization
In some respects, macro-economic management was also one of the casualties of the liberalization. A case in point is the exchange rate. The floating of the Australian dollar initially had the desired effect of delivering a competitive exchange rate. When commodity prices fell sharply in the mid-1980s and with it Australia's terms of trade, the nominal exchange rate also declined. Even though inflation continued to exceed that of major trading partners, the decline was substantial enough for the real effective rate also to fall significantly. The economy recovered strongly from the terms of trade decline, but again began to experience unsustainably large current-account deficits. To cool an overheated economy, the government adopted a moderately conservative fiscal policy, as noted. But the fiscal restraint proved insufficient, and so the government resorted to ever-tighter monetary policy. By the end of the 1980s interest rates were at record levels, in excess of 10 per cent in real terms. The consequent mismatch between fiscal and monetary policy proved disastrous. Capital inflow led to a substantial ...Show more

Summary

The macro-economic environment supporting the Australian micro-economic reforms have been satisfactory is some respects, but notably deficient in other areas. It is imperative to examine these developments briefly, since, if the major problem areas are not resolved, they have the potential to disrupt the genuinely significant achievements and frustrate the path towards an internationally oriented and efficient economy…
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Macroeconomic Policy Bachelor Essay essay example
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