۱- Introduction

۲- Underlying causes of the GFC

۳- The macroeconomic policy response

۴- Problems with basic Keynesian theory

۵- The Australian GFC experience

۶- The Australian macroeconomic policy response

۷- Lessons for Australian macroeconomic policy

References

Abstract

This paper proposes lessons for macroeconomic policy stemming from the monetary and fiscal responses to the 2008–۰۹ Global Financial Crisis, with an emphasis on Australia’s experience. After canvassing hitherto underemphasised global factors leading up to the crisis, including China’s rise and its effect on global saving, external imbalances and world interest rates, the paper critically evaluates the G20’s macroeconomic policy response to the crisis and its public debt legacy, especially for advanced economies. It then revisits Australia’s GFC performance, highlighting its macroeconomic behaviour at the time and the effectiveness of the monetary and fiscal responses. Lastly, it summarises what the episode implies for any future macroeconomic policy response to a crisis.

Introduction

With the benefit of a decade’s hindsight, what lessons should we have learned about the macroeconomic policy response to the 2008–۰۹ Global Financial Crisis? Deemed the most cataclysmic financial event since the Great Depression, Group of Twenty (G20) central banks and governments deployed a range of co-ordinated monetary and fiscal measures to counter the macroeconomic impact of the crisis. Although the GFC buffeted economies worldwide, it affected advanced economies (AEs) more severely than developing and emerging economies (EEs), with AEs subsequently enduring weak economic growth, record low interest rates, anaemic private investment, poor productivity, reduced working hours, sluggish wages growth and high public debt. Sparked by the collapse of Lehman Brothers bank in September 2008, the GFC sparked further bank failures in the US, Europe and the United Kingdom, shrank asset values, and created havoc in global debt, equity, derivative and foreign exchange markets, reflecting a major loss of investor confidence. Bank credit contracted, stock and commodity prices plummeted and real economies contracted worldwide over the following two years. Although robust banking and financial systems protected many economies including Australia, from the worst effects of the GFC, due to the widespread slump in private investment nearly all economies around the globe experienced a marked slowdown in GDP, reduced working hours and rise in unemployment. This paper’s main aim is to address the question posed at the outset. As background, Section 2 canvasses the underlying causes of the GFC, highlighting the global saving boost stemming from China’s rise, external imbalances between the major Asia-Pacific economies, and the low interest rates and easy credit that prevailed in many advanced economies in the years leading up to the crisis. Section 3 then critically evaluates the monetary and fiscal policy responses to the GFC co-ordinated through the G20 that resulted in historically high public debt levels and low interest rates, especially in AEs. Section 4 then recaps the Australian GFC experience, before Section 5 summarises the main lessons that should have been learned for monetary and fiscal policy.