Topic 21: Australia and the GFC

Question 1

What was the initial GFC shock for Australia?

Answer 1

• Decline in bond yeilds overseas decreases r* (this is more temporary, increased bond issues by gov*s pull this back)
• Delines in export demand, from Yn*
• Slightly later, NFI decreases as the domestic economy saves more and investor confidence falls.

Question 2

What were the subsequent GFC shock elements in Australia?

Answer 2

• Chinese economy stabilises, exports stop falling, at a still high level.
• Investment confidence returns, r_c^e increases
• Consumer confidence returns, Y_F^e increases

Question 3

What was the Australian policy response to the GFC?

Answer 3

• Commodity price drop reduces company tax & rolyalties, a decrease in revenues.
• Big fiscal expansion.
• Taxes never catch up.

Question 4

Was there a better alternative to a fiscal expansion in Australia during the GFC?

Answer 4

• In sept-oct in 2008 there was a panic in financial institutions
• The RBA and the treasury are the best informed public institutions in teh country
• The benefit of hindsight suggests the fiscal expansion was overkill - even waiting for a week or too would have made this clear
• The 2009 Shaan lecture defense by Eslake argued the stimulus was about confidence, and that existing analysis may understate it’s effect
• Still a good insurence policy in the case that China did not recover.

Question 5

Why has the GFC made the Aussie dollar high?

Answer 5

• Not due to commodity prices.
• Deteriorating quality of sovereign debt, especially in Europe.
• QE in Europe and the US reducing yeilds