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Abstract

This paper argues that Australia needs a contingency plan for monetary policy when interest rates hit zero, and considers various options. Level targeting appears undesirable as a long-run policy due to the lack of an appropriate target variable-prices, wages and nominal GDP all being unsuitable-but may be useful as a temporary expedient. Other possibilities include a higher inflation target and temporary exchange rate targeting. Could 'it' happen here? Australia survived the global financial crisis relatively unscathed, despite much higher interest rates than in other developed countries (see Figure 1). But our exceptional status may be short-lived. In May 2015, the cash rate was cut to 2 per cent, the lowest level since the current series began in 1990, and by some measures the lowest short-term rate since at least 1960. Nevertheless, unemployment has risen steadily, despite the fact that investment in the resources sector has yet to fall back to normal levels.