Australia's Stevens Posits Whether Policy Has Reached Its Limits

  • RBA chief says helicopter money easier to start than to stop
  • Stevens urges renewed focus on problems restraining growth

Australian central bank Governor Glenn Stevens speculated that monetary policy may have reached its limits in spurring economic growth and suggested this could explain why markets are being easily rattled.

“Monetary policy alone hasn’t been, and isn’t, able to generate sustained growth to the extent people desire,” Stevens said in a speech in New York on Tuesday. “Maybe we need to be clearer about what we can’t do. Monetary solutions are for monetary problems. If there are other problems in the underlying working of the economy, central banks won’t be able to solve those.”

The irony here is that Stevens, who has resisted the global movement to further easing and kept his benchmark rate at 2 percent for almost a year, is facing a currency that has reversed course in the past three months and threatened his push to broaden Australia’s growth drivers. He warned in minutes of this month’s policy meeting Tuesday that the Aussie’s appreciation could complicate efforts to rebalance the economy away from mining.

Stevens, who is in the final months of his 10-year stint at the helm of the Reserve Bank of Australia, also questioned in the notes of his speech whether central banks and their unorthodox policies are solely responsible for the decline in long-term interest rates. 

“Monetary policy is not supposed to be able to affect real variables -- like real interest rates -- on a sustained basis,” he said. “Presumably, changes in risk appetite, subdued growth and expectations that growth will continue to be subdued have also played a role in lowering real rates.”

He said an understanding of the limits of policy and the need for more growth and inflation lay behind commentators’ recent discussion of helicopter money -- when central banks directly finance government stimulus. The discussion of the 1969 proposal from Nobel laureate Milton Friedman comes after repeated interest-rate cuts and asset purchases have failed to bolster inflation sufficiently.

‘Desperate Measures’

“The main complication is surely that it would be a lot easier to start doing helicopter money than to stop, if history is any guide,” Stevens said Tuesday. “The governance requirements in doing so would be, if not intractable, at least very complex. Desperate times call for desperate measures, perhaps. Are we that desperate?”

Stevens, in New York after attending International Monetary Fund and Group of 20 meetings in Washington, said it was time to confront the question of whether trend growth is now lower and if issues like demographics and excess debt are behind it. He suggested redoubling efforts to address problems that might be unnecessarily restraining growth, including:

  • inadequately capitalized banks in some jurisdictions;
  • over-leveraged firms or households;
  • poor incentives for risk-taking of the “right” kind; and
  • practices that unnecessarily impede productivity, or slow down the reallocation of capital from old industries to new ones.

“While people find global growth outcomes still a bit disappointing, we are reaching the limits of monetary policy in boosting it,” Stevens said. “It is certainly clever to find ways of pushing the effective lower bound for interest rates down a bit further. It is inventive to find ways of lending more, at more generous terms, to the private sector. But surely diminishing returns are setting in.”

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