Assignment 2

Two Policy Blogs

ID Number: Surname: First Name:

POLICY BLOG ONE:

“COVID-19 Pandemic and the Evaluation of Macroeconomic Policy Measures in

Australia”

Economic growth is the foundation for more employment opportunities, increased

wealth, and higher living standards, all of which are goals of macroeconomic policy.

Macroeconomic policy is built on the three pillars of fiscal policy, monetary policy, and

exchange rate policy. Macroeconomic policy examines the economy as a whole.

A record low overnight cash rate of 0.25% was implemented by the Reserve Bank of

Australia (RBA) and the government recently. The response from the RBA, the government,

and the Australian Prudential Regulation Authority (APRA) reflects the pandemic's and the

economy's rapid evolution as well as the possibility of a materially worsening of the

operating environment for banks. The four largest Australian banks, which together make up

around 75% of system loans as of the end of January 2020, have sufficient capital and

liquidity to ride out the interruption, at least for the time being (Higginson et. al, 2020). The

growing use of the RBA's liquidity facilities is not, in and of itself, a bad development or a

sign of ineffectiveness lack the liquidity management methods of Australian banks in our

opinion.

Accelerating regulatory response to boost the economy is unlikely to prevent rising

impairment costs and bad debts for financial institutions. As unemployment rises despite
government efforts to slow it down, the ripple effect of plummeting consumer confidence,

social isolationism, and travel restrictions will be seen first in commercial exposures and then

in mortgage exposures. When the epidemic is under control and travel and other restrictions

are eased, the severity of the asset-quality deterioration will increase.

High levels of provisioning and credit losses, along with revenue from contracting

fees, will put a dent in a bank's bottom line under the existing accounting system. Banks are

required to make provisions for a considerable rise in credit risk under the IFRS 9 anticipated

credit loss (ECL) approach, even if the exposure is not impaired. Australian banks are

expected to see a drop in asset quality and earnings in 2020, however this is likely to be

underestimated due to the environment's quick evolution and the worsening local and global

outlook. The RBA dropped the overnight cash rate to 0.25% and signalled that it would

remain there until the inflation objective of 2%-3% was fulfilled (Kakhkharov, J., & Bianchi,

R. J, 2022).

In terms of monetary policy, this is a major loosening. The RBA has reaffirmed its

commitment to minimizing the effects of the government shutdown and the Coronavirus on

businesses and households. Its measures are meant for securing jobs, money, and keeping

business operational. The Australians are making progress on this issue, even though this is

not a solution that will immediately end the slump. As was previously said, our collective

attention is currently fixed on healing and ending the virus's destructive cycle in our culture.

In reaction to the epidemic, the government of all nations indulge in expansionary monetary

and fiscal policies so as to strengthen the economy (Elgin, C., Basbug, G., & Yalaman, A,

2020). In order to expand budgetary flexibility, policies should be crafted in a manner that

priority areas get the greatest attention. Finding new, non-tax revenue sources is a priority.
 The COVID-19 crisis that began in 2020 and is still going strong has caused

economic declines worldwide, and Australia's economy is no exception. With the crisis

affecting countries and creating increased unemployment rates, firm closures, and a fall in

GDP, economies have began trying to help their economy recover even as they apply

limitations and rules to help prevent the spread of the virus. Australia has not been ignored in

the worldwide effort to save failing economies. The Reserve Bank of Australia (RBA) has

lowered its cash rates and overnight cash rates, bought bonds and securities, and set up a term

funding facility to aid with this. Funding facility included; these measures work to expand the

economy's monetary base by making more credit available from financial institutions by

boosting their reserve funds.

An example is the drop of interest rates from 0.25% to 0.1%, which aims to raise the

currency in circulation and loans in enterprises, with individuals, and aid the trade-exposed

industries with the exchange rates. Overnight cash rates, at which banks borrow reserves,

have been reduced to these low levels. With the overnight cash rate so low, banks will borrow

more from one another, growing their rank reserves and allowing them to extend cheap loans

to customers. It has been necessary to raise the money supply during the covid 19 crisis in

order to save economies and provide their GDPs a fighting chance of growing (Fernando, R.,

& McKibbin, W. J, 2021). To this end, the Reserve Bank of Australia has been established.

As a result, employment in Australia has increased with the increase in funds, and now

Australians have a greater chance of being self-employed, investing, and growing

consumption thanks to the increase in money supply from the funds from TFF, the loans from

decreasing interest rates and growing reserves, and the Reserve Bank purchasing bonds and

government securities from the open market.

The potential for companies to enhance investment, spending, and related activities

has also improved. Australia is striving to pull itself up by its own bootstraps with these
policies; it will take time, but eventually all economies will recover from the threat of this

catastrophe, including Australia's. However, there are drawbacks to and risks associated with

expansionary economic policy. For example, a rise in money supply causes price levels to

increase, resulting to inflation rates. Increases in inflation tend to weaken currencies because

consumers have less spending power when their money goes further. However, there is also

the possibility that Australians will not utilise the additional funding and loans offered by the

Reserve Bank of Australia to stimulate the economy. If individuals and businesses are not

working in sync with the Reserve Bank, these policies have a minimal likelihood of success.

The initiatives have boosted the economy by, among other things, lowering unemployment.

However, the Bank's efforts to salvage the economy will fail if the government and private

sectors don't cooperate together.

References

Elgin, C., Basbug, G., & Yalaman, A. (2020). Economic policy responses to a pandemic:

Developing the COVID-19 economic stimulus index. Covid Economics, 1(3), 40-53.

Fernando, R., & McKibbin, W. J. (2021). Macroeconomic policy adjustments due to COVID-

19: Scenarios to 2025 with a focus on Asia.

Higginson, S., Milovanovic, K., Gillespie, J., Matthews, A., Williams, C., Wall, L., ... &

Paolucci, F. (2020). COVID-19: The need for an Australian economic pandemic

response plan. Health policy and technology, 9(4), 488-502.

Kakhkharov, J., & Bianchi, R. J. (2022). COVID-19 and policy responses: Early evidence in

banks and FinTech stocks. Pacific-Basin Finance Journal, 74, 101815.

“Inflation Targeting in Australia: Policy Challenges Post COVID-19”

Australia's long-term goal for inflation is to keep CPI increases between 2% and 3%

per year. Specifically, the Consumer Price Index is the index that measures inflation in

consumer prices (CPI). Because it is created independently by the Australian Bureau of

Statistics, is freely available to the public, and does not undergo revisions to its historical

data, it is an appropriate measure of inflation to target. Inflation targeting is one tool the

Reserve Bank employs in its pursuit of price stability, full employment, and the economic

and social well-being of the Australian people. This is due to the fact that low and stable

inflation, which is what price stability entails, aids in the expansion of the economy over the

long term. If inflation is kept within a target range of 2% to 3%, the many negative effects of

either high or low inflation on the economy can be avoided (Cornish, 2019).

Before the 2020 pandemic caused by the Corona Virus, Australia's economy has

never experienced a recession. In 2020, a worldwide epidemic was caused by the Corona

Virus. As a result of the COVID-19 pandemic, a recession became inevitable. For the first

time in almost thirty years, the country experienced a recession. Economic growth and

recovery are projected by recent data. However, the nation must take steps to ensure the

expansion will continue indefinitely. The federal government needs to restructure the

economy and introduce measures that promote long-term expansion.

The economy is driven by a wide variety of industries. Mining is an important

economic sector. Adding $202 billion, or 10.4%, to the nation's gross domestic product, the

industry is the largest single contribution to the economy (Abidin, C., Lee, J., Barbetta, T., &

Miao, W. S, 2021). Besides these three industries, the financial sector, academic institutions,

and tourism also play significant roles. When the country went under lockdown in 2020, it
was bad news for these sectors, especially the service sector. Low levels of household

spending, no tourist attractions, and low levels of migration were all observed. As a result of

these regulations, the industry's productivity dropped, which slowed the economy.

The economy is looking strong right now, which bodes well for the future. Compared

to the same period last fiscal year, Q1 2018 saw a rise of 1.8%. There is renewed optimism

about the economy thanks to this expansion. Because of the government's effective response

to the pandemic, fewer limits have been placed on people's ability to travel and gather

resources, which has helped to stimulate the economy. Businesses and consumers alike have

boosted their spending as a result of the rising demand for goods and services (Hartigan, L.,

& Morley, J, 2020). Government spending has also increased, helping the economy expand.

As vaccines continue to be distributed, businesses will be able to open their doors and begin

producing at or above last year's levels.

However, the data collected prior to COVID-19 indicate a worsening economy.

Growth rates of 3.4% in the 1980s, 3.3% in the 1990s, and 3.1% in the 2000s were all lower

than the 2.6% seen from the first quarter of 2010 through the first quarter of 2020. (Burn,

2020). This slowdown was repeated in the first three months of 2020, when growth dropped

by 0.8% from the prior period. The data indicate that the economy has some fundamental

flaws despite having favourable terms of trade. Slow income growth outside of the financial

and mining sectors is one such problem. Investment in non-mining industries was similarly

modest, as was productivity growth and the development of new homes. These flaws

endanger the economy's viability over the long term and must be fixed.

Australia's population growth may remain lower than normal for some time as a result

of the COVID19 pandemic. There will be negative effects on the economy as a whole

because of this, as the number of people looking for employment and the number of people
entering the labour force (including skilled migrant workers) will both fall. The significance

of increasing the number of people in the work force is reaffirmed.

Given the substantial economic uncertainty that exists, an uptick in company

investment may be stymied by the high risk associated with making large purchases. While

consumer spending should soon improve, moderate wage growth could slow it down in the

future. Australia's lacklustre productivity growth is one cause of this.

The state of political and economic ties with China has worsened. This is a significant

threat because mainland China is Australia's primary export market; in 2019, it received

about 38% of Australia's merchandise goods exports and 19% of Australia's service exports.

Current macroeconomic policies are correctly focused on stimulating demand and

supporting employment as a result of the significant slack in the economy caused by

COVID19. But the economy was poor before the epidemic, and some of the medium-term

issues it faced, such weak productivity growth, are likely to still be significant after the

pandemic. These concerns also require attention as the economic recovery continues to help

us get back to a better economy.

The current inflation in Australia is a result of both short-term and long-term

variables, as well as supply and demand imbalances. Adaptive economic management is

essential for overcoming this new obstacle. Australia's inflation rate has hit 5.1%, the highest

level since the GST was implemented in 2000. The underlying inflation rate is currently

about 3.15%, which is the highest it has been in almost a decade. The inflation rise is caused

by a number of causes, both short-term and long-term, including supply and demand

concerns, which makes it difficult to design a policy response (Abidin, C., Lee, J., Barbetta,

T., & Miao, W. S., 2021).

them to all-time highs compared to where they had been before the COVID outbreak. Over a

third of the world's palladium and more than a tenth of its oil come from these two countries.

There are unsettling parallels to the 1970s, when an already rising inflationary climate was

exacerbated by a jump in oil prices caused by supply concerns. Inflationary expectations were

allowed to rise due to the lack of decisive policy action. The resulting inflation affected more

than just energy costs, and it took years to work its way out of the economy (Cornish, 2019).

As seen with the Volcker shock in the 1980s and the "recession we had to have" in the early

1990s in Australia, this usually necessitated the implementation of tight monetary policy.

It's encouraging to see that the policy framework has strengthened since the 1970s. As

the Bretton Woods system of fixed currency rates collapsed in the 1970s, several central

banks struggled. Most central banks now have inflation targets that have been in place for

some time and have a track record of success. For instance, Australia's inflation rate has been

relatively stable at roughly 2.5 percent since the Reserve Bank set a 2-3 percent objective in

the early 1990s.

In addition, the global economy's lessening reliance on energy means that rising oil

prices should have less of an effect on inflation than they did in the 1970s. It has been

recently estimated that for every 10% increase in oil prices, inflation rises by 0.2% in the

average economy (Hartigan, L., & Morley, J, 2020). Central banks have begun a late

tightening of monetary policy in response to rising inflation. A number of factors are

contributing to the increase in interest rates, including the unwinding of bond purchases by

central banks. Because of this, and the disruptions caused by the conflict in Ukraine, global

economic growth is projected to slow. The IMF has already reduced its projections for global

economic growth in 2022 by 0.8% in its most recent forecasts.

Abidin, C., Lee, J., Barbetta, T., & Miao, W. S. (2021). Influencers and COVID-19:

reviewing key issues in press coverage across Australia, China, Japan, and South

Korea. Media International Australia, 178(1), 114-135.

Burn, P. (2020). How Strong was Australia’s Economy before COVID-19 Struck? AiGroup.

Cornish, S. (2019). The evolution of inflation targeting in Australia. History of Economics

Review, 72(1), 4-34.

Hartigan, L., & Morley, J. (2020). A Factor Model Analysis of the Australian Economy and

the Effects of Inflation Targeting. Economic Record, 96(314), 271-293.