With the country plunged into recession we must be realistic about the challenge we face. Monetary policy is likely to be less effective than at any time since the Great Depression and given the scale of the downturn we must embrace fiscal policy to ensure a robust recovery.
Conventional thinking about macroeconomic policy assigns central banks a leading role in managing the business cycle. The task of fiscal policy has been to stabilise the public debt. It is time to reverse this thinking.
In past recessions, the Reserve Bank of Australia has lowered the cash rate substantially to encourage spending. For example, during the global financial crisis rates were lowered some 400 basis points.