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Australian Monetary and Fiscal Policy

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Australian Monetary and Fiscal Policy
Work Level   Master level
Type of Paper   Essay
Pages   4
Words  1058
Published   24/05/2022

A Monetary policy for any particular country is a process regulated by the monetary authorities whereby the supply of money is controlled through a target rate of interest on overnight loans in the money market. This greatly affects the economy in terms of the character of borrowers, lenders, and the rate of inflation.

Monetary policy is implemented through changes in liquidity; these influence interest rates through the resultant changes in the cash reserves of the trading banks. These changes in interest rates in turn affect the level of real economic activity: Very low or falling interest rates tend to encourage economic expansion, and high or rising interest rates tend to constrain it.

The reserve bank of Australia mainly controls the stability of prices, the economic prosperity of employees, and the welfare programs of the countrymen. As such, different economic targets have been set over a period of time to maintain consumer price inflation so as to keep the money value and wealth, and strong growth builds up over long-term periods.

The Australian fiscal policy is based on a period whereby, the government’s income statement is in good order. Through this policy, the bodies of regulators work at improving employment balance business cycles in order to control the economy.

According to John Maynard Keynes, governments could exchange economic performance by adjusting tax rates and spending. In the case of a recession, for example, the government reduces taxes to fuel the economy. This policy however tends to affect individual groups of people.

The exchange rate policy entails ways in which a government body changes currency in relation to other currencies and the foreign exchange market. Australia has a floating exchange rate meaning that its market dictates movements in the exchange. This has greatly contributed to reduced output volatility and enabled the reserve bank to set Australia’s monetary policy.

The two Australian dollar exchange rates are the bilateral exchange rates against the US dollar and the trade-weighted index. This gives a measure of whether the Australian dollar is rising or falling against the leading trading partners on average.

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Reasons for the Formation of the Commonwealth Bank and Its Gradual Growth as a Government Business Enterprise and Central Bank Up To 1959

Prior to the establishment of the commonwealth bank, private banks such as The New South Wales used to issue notes so as to provide a sound currency. With the rising competition of other newly formed banks, the banks would take deposits and re-loan the money by discounting bills of exchange. The bills would then be considered as bank assets and later would issue banknotes on the security of these assets.

However, during the economic boom, such banks would expand their income statement by issuing these banknotes. During the economic depression, they would fail to honor. In 1893, a crisis struck the country when 12 prestigious banks were shut down in a span of six weeks. This was catastrophic to the economy of Australia since two-thirds of Australia’s assets were unaccounted for.

This resulted in the formation of the commonwealth bank. With the start of the worldwide economic depression, most of the Australian export prices had already declined rapidly and, as a result, the federal government had to take major action to solve the problem of providing services to its foreign debts. The commonwealth bank was formed as a central bank to issue banknotes that would be backed by Australia’s resources. This, therefore, solved the sound currency problem by the year 1924 and the soundbank lending problem.

The bank also became the Australian government’s financial sponsor during the world war; it was used in marketing the country’s exports, management, and floating loans raised domestically. After the war, the bank continued to have a key role as a savings and trading bank; this being a result of the devaluation of the currency from the gold standard.

In 1935, the bank could dictate overdraft rates and later on the statutory reserves, deposits ratios, and liquid assets ratios. The rise of the commonwealth bank as a government business was related to many factors including the need to cut the government’s expenditure after the war to reduce debt. The commonwealth bank act in 1929 enabled the bank to formally summon Australian Gold and forbade exports without their signatures. This was a result of the worldwide depression and the subsequent decline of Australian export.

Eventually, gold holdings and foreign exchange holdings by the trading banks came to an end. These banks played an important role in the earlier years of preserving stable exchange rates, especially against the pound sterling. All foreign exchange received in Australia was sold by its approval.

In 1935-1937, a major argument erupted over the control over the monetary policy. This led to several amendments. Eventually, the bank was divided into two bodies: the Reserve bank of Australia in the 1960s and the Commonwealth bank cooperation which comprised trading banks, savings banks, and development banks.

Through the new commonwealth bank act introduced in 1924 and the banking act in 1945, a new board was constituted consisting of six members. The banks’ administrative authority over the monetary and banking policy was made official. The exchange rate policies and the current governor responsible for the management of the institution were also stated.

With several amendments made prior to 1952, a new board consisting of the governor, his deputy, and treasurers’ secretary was formed. The ten members were to perform the role of a manager which was earlier conducted by the governor.

In 1959, a branch of the commonwealth bank responsible for the executions at the central bank was reassigned to the new reserve bank of Australia while the primary roles as the commercial and saving bank were retained. This resulted in a separate central bank which took effect on 14th January 1960.

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