EFN405 Applied Economics: Fiscal & Monetary Policy Impact on Australia

This report analyzes Australia's economic growth trends from 2011 to 2017, highlighting cyclical fluctuations and key drivers like household consumption and exports. It examines the Reserve Bank of Australia's (RBA) loose monetary policy, characterized by a gradual decrease in the cash rate, and the government's expansionary fiscal policy involving increased spending and budget deficits. The report further explores the implications of these policies on the housing market, noting the increased demand for credit and the potential for housing bubbles. It concludes by suggesting a likely increase in the cash rate, aligning with global trends, which may lead to corrections in the property market and potentially lower growth in the medium term. Desklib provides access to this and other solved assignments for students.

Running head: APPLIED ECONOMICS
Applied Economics
Name of the Student
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Course ID

1APPLIED ECONOMICS
Table of Contents
Economic growth trend in Australia..........................................................................................2
Fiscal and Monetary policy in Australia....................................................................................2
References..................................................................................................................................5

2APPLIED ECONOMICS
Economic growth trend in Australia
Mar-2011
Jul-2011
Nov-2011
Mar-2012
Jul-2012
Nov-2012
Mar-2013
Jul-2013
Nov-2013
Mar-2014
Jul-2014
Nov-2014
Mar-2015
Jul-2015
Nov-2015
Mar-2016
Jul-2016
Nov-2016
Mar-2017
Jul-2017
Nov-2017
0.0
0.5
1.0
1.5
2.0
2.5
Economic growth
Quarter
Rate of growth
Figure 1: Trend in economic growth of Australia
(Abs.gov.au, 2018)
The economic growth in Australia has undergone a cyclical fluctuation over. Gross
Domestic Product in the first quarter of 2016 grew at a rate of 1.1 percent. This is the fastest
growth rate since the third quarter of 2012. Market had been expecting a slow year on year
following the downward revision of economic growth in the fourth quarter of 2015. The two
quarter of negative GDP indicated a technical recession in the economy between 2011 and
2017. It has been almost a century since the Australia had been in a recession. The main
drivers of economic growth in Australia are final consumption expenditure of the household
and export (Cravino & Levchenko, 2016) The contribution of consumption and exports are
0.4 percent 1.1 percent respectively. In addition to household consumption expenditure,
government consumption expenditure contributed 0.2 percent of GDP. Factors significantly
influencing Australian GDP include cyclical fluctuation in commodity prices like minerals,
agricultural export and energy.
Fiscal and Monetary policy in Australia
Monetary policy refers to the policy related to interest rate. The figure below shows
Australian cash rate from 2001 to 2018. As evident from the figure, RBA was undertaken
strategy of a loose monetary policy from 2011 to 2017. RBA set the cash rate to a lower level
in order to have the intended effect (Yates, 2016). There is a gradual downward trend in the
cash rate with cash rate now set at the lowest level of 1.25 percent.

3APPLIED ECONOMICS
Figure 2: Trend in cash rate
(rba.gov.au., 2018)
Fiscal policy refers to the policy related to tax and government expenditure. From the period
2011 to 2017, government has significantly increased its spending as a percentage of GDP.
This caused the government to run with a budget deficit increasing the issuance of
government bonds. Fiscal policy was strongly expansionary during the first two years of
financial crisis. In the consequent year of 2012-13, government took an expansionary fiscal
policy. Since 2012, government sticks to the decision of expansionary fiscal policy (Kudrna,
Tran & Woodland, 2015). The economy thus receives a strong support from the government
over the business cycle.
Figure 3: Impact of monetary and fiscal policy on economic growth

4APPLIED ECONOMICS
Fiscal and monetary policy have implication for housing market. The historically
lower cash rate increases demand for credit encouraging purchase of property. Both the
expansionary monetary and fiscal policy boost the aggregate demand in the economy. This
along with increasing economic growth creates pressure on housing market. The long-term
trend in housing market is upward rising. This is partly due to support of fiscal and monetary
for investment in the property market over other.
As argued by Keen (2017), decline in a major sector like the one housing would likely
to cause a recession in Australia. The government therefore should not ignore the growing
concern of dominance of housing loan in the book of bank as claimed by Scheule (2006).
However, government has attempted to monetary policy tightening. Much care however
should be given to address the issue upcoming housing bubbles in the economy (Guerguil,
Mandon & Tapsoba, 2017). Cash rate in Australia thus is likely to increase in line with the
global trend of tight monetary, tight fiscal and rising inflation. This would likely to cause
correction in the property market and low growth trap in the medium term.

5APPLIED ECONOMICS
References
Abs.gov.au (2018). 5206.0 - Australian National Accounts: National Income, Expenditure
and Product, Sep 2018. [online] Abs.gov.au. Available at:
http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5206.0Sep%202018?
OpenDocument [Accessed 15 Jan. 2019].
Cravino, J., & Levchenko, A. A. (2016). Multinational firms and international business cycle
transmission. The Quarterly Journal of Economics, 132(2), 921-962.
Guerguil, M., Mandon, P., & Tapsoba, R. (2017). Flexible fiscal rules and countercyclical
fiscal policy. Journal of Macroeconomics, 52, 189-220. References
Kudrna, G., Tran, C., & Woodland, A. (2015). The dynamic fiscal effects of demographic
shift: The case of Australia. Economic Modelling, 50, 105-122.
rba.gov.au (2018). Cash Rate. [online] Reserve Bank of Australia. Available at:
https://www.rba.gov.au/statistics/cash-rate/ [Accessed 15 Jan. 2019].
Yates, J. (2016). Why does Australia have an affordable housing problem and what can be
done about it?. Australian Economic Review, 49(3), 328-339.