“Grim23” on fiscal policy versus monetary policy in Australia

By a complete accident I found a online debate about fiscal policy versus monetary policy in Australia. One of the commentators – “Grim23” – surely is a convinced Market Monetarist. I thought what he is writing is so good that I want to reproduce it here on my blog – I hope he won’t mind…

Here is Grim23 going back and forth with somebody – I don’t care who the other guy is and this is only Grim23’s (unedited) comments:

…How can fiscal stimulus boost demand when the central bank is targeting inflation? If interest rates are above zero, the central bank should have no problem hitting its inflation target. if they fall to zero, there is a case for fiscal stimulus, but monetary policy would still be effective.

Monetary policy in the US, UK and Europe has been extremely tight since mid 2008. Australia had much more effective monetary policy than Britain during the crisis. Fiscal policy has nothing to do with it. Every serious new keyensian macroeconomist will tell you that if interest rates are above zero the fiscal multiplier is zero.

…If you admit that monetary policy was effective, then by definition fiscal policy is ineffective and wasteful. If monetary policy can hit its target of 2-3% trend inflation, what’s the point of fiscal stimulus?

While we are quoting people, how about prominent Keyensian economist Brad Delong:

“Here is the point: an optimizing central bank that cares only about inflation and unemployment because it does not find itself at the zero nominal lower bound and does not fear engaging in nonstandard monetary policy will engage in full fiscal offset: it will take care to make sure that if fiscal policy becomes more stimulative then it will make monetary policy less stimulative by the same amount.”

Tim Harcourt did not take the monetary offset into account. In fact few studies take it into account when they really should.

…Ultimately the point is that because fiscal stimulus boosts aggregate demand, inflation must also rise as well as GDP. If the RBA is targeting inflation (or preferably nominal GDP) then any fiscal stimulus is cancelled out by monetary policy, leaving a “fiscal multiplier” of zero.

…1. You agree with Brad Delong’s quote which means you admit that an inflation targeting central bank will engage in full monetary offset. That means that the fiscal multiplier is zero.

2. In terms of “saving Australia from recession”, inflation and unemployment are the only outcomes that matter. If you agree with the Brad Delong quote, I can’t see how you can still claim that fiscal stimulus boosted aggregate demand and saved the economy.

I would say that most of the countries hit are in the Eurozone, so big fiscal stimulus in one country would work, because each country doesn’t have its own monetary policy. Also, most central banks weren’t brave enough to do unconventional stimulus when interest rates hit zero, so fiscal stimulus would have had some effect, as central banks were no longer really “aiming” to hit a target. Thats why there was some correlation

If you want some links, then the best blog for this is The Money Illusion.

Here’s a post on monetary offset. Read point 6 in particular. Fiscal austerity is deeper in the US than the Eurozone, but monetary policy is easier. US is growing faster. Money wins. http://www.themoneyillusion.com/?p=21008

Here’s a couple of posts about Australia, talking about the stable growth rate of NGDP. Australia has a much higher trend growth rate than other countries, which put us in a better position to start with.


Ultimately tight monetary policy causes slow NGDP growth, not financial crises or fiscal austerity, and only easy money can support faster NGDP growth, not fiscal stimulus.

Yes, fiscal stimulus can “work”, but only because the central bank allowd it to. Do you really think the RBA would let Australia fall into recession? Particularly when they started off from a much better position than other central banks, with interest rates not even close to zero here. Monetary stimulus would have done the job anyway, without any waste or extra debt. That’s why fiscal policy never “saved” us.

Here’s some more posts discussing fiscal stimulus and monetary policy in general:


Fiscal stimulus in unnecessary. Money always wins

…Your argument simply isn’t consistant with standard macro theory; the fiscal multiplier is zero under inflation targeting. Even keynesians like paul krugman, brad delong, michael woodford, ben bernanke, greg mankiw, frederik mischkin and christie romer will attest to that if interest rates are positive.

In Australia interest rates never got close to zero.

You argument does not support recent events, with no correlation between “austerity” and economic growth. Nor have you refuted any of the arguments made in the links.

While Australia recovered quite quickly, other nations have done better since. Germany is one example, where the fiscal stimulus was average but growth has been faster than Australia’s since 2010.

There is still not sufficient evidence that Australia would not be in the same position were it not for the fiscal stimulus. I find it hard to believe that the RBA would have let Australia fall into recession without fiscal stimulus, nor do i doubt that it had the means to stabilise nominal GDP growth, especially with the fortunate position of positive interest rates.

I think the fact that we were the only country with interest rates which never went below zero is just as persuasive as your argument about the relative size of the stimulus. I think it is more persuasive given the wider context and evidence. I think your mistake is assuming that correlation implies causation.

…As you should know, there is no meaningful difference between 0.5% and zero percent benchmark rate.

If famous nobel prize winning economists can talk about the federal reserve having a “zero rate policy”, then that technical detail should not be important. that just shows how out of touch you are with the sophisticated macro debates going on at the moment.

The point is rates can go no further in countries other than poland and australia. I have provided you with plenty of reasons why your figures don’t support your clsim of the effects of fiscal stimulus. In your reply you dont even mention the links, or reply to all of my criticism. Either you didn’t read them, or you can’t refute them. But they explain Australia’s and Poland superior performance without reference to fiscal stimulus. I suggest if you want to learn a little macro, you should read them. What i am saying is not controversial, every single new keyensian economist and every market monetarist will tell you the same thing!

As for Germany, the world bank data said it grew faster in 2010 and 11. My links are sound.

I have no clue who Grim23 is, but he is good good and he can write a guest post on this topic for my blog any time he wants.

PS Grim23 unfortunately didn’t quote this post on Australian monetary policy why it was the “Export Price Norm” that really has kept Australia out of recession.

PPS I believe that RBA recently has allowed monetary conditions to become too tight and the sharp slowdown in NGDP growth over the past year is somewhat worrying.

Leave a comment


  1. Rob Rawlings

     /  May 8, 2013

    I agree with the points in this post about monetary offset of fiscal policy. I have question about inflation under fiscal v monetary policy.

    Assume 2 scenarios under a regime where a CB targets 2% inflation.

    1. There is no fiscal policy so the target is hit using monetary policy alone

    2. There is fiscal policy which would cause the target to be missed. The CB offsets the fiscal policy with monetary contraction in order to hit the target.

    You get 2% inflation each time but are the results the same in terms of RGDP (and employment levels) ? A Keynesian might argue that fiscal policy (say investment subsidies or payroll cuts) will lead to a greater proportion of new spending being on investment and this will lead to a bigger increase to RGDP than from pure monetary policy where market forces determine how much RGDP growth v inflation will result.

    is this Keynsian argument correct or is there a flaw in the logic ?

    • Rob Rawlings

       /  May 8, 2013

      correction: “payroll tax cuts” not “payroll cuts”

  2. Grim23

     /  May 8, 2013

    Wow. By chance I came accross this post as I was visiting the site to find an interesting older post that I read once and might be relevant. I really appreciate your comments about my debate.
    I’m just a post grad student near the end of a one year break from study. I’ve been reading the money illusion for a couple of years now, so I’m pretty familiar with all the market monetarist arguments.
    I should come here more often, as it gives a good insight into the international monetary side of things. Hope I can keep up with all the posts!
    Btw, there is another response from him in the debate. It’s late now, so I won’t respond until morning (australia time), but you might like to check it out. I’ll try think of an reply, but I don’t think this guy will ever get it.

  3. fsateler

     /  May 8, 2013

    Fiscal stimulus in unnecessary. Money always wins. …
    In Australia interest rates never got close to zero.

    Ok, I’ll play devils advocate. Monetary policy works because the central bank aims for a target (IT or NGDPLT). As we have seen in most developed economies, at some point close to the ZLB, central banks are unwilling to aim for the target, for some unspecified reasons.

    In that context, fiscal stimulus does play a role by denying the central bank reasons to not aim for he target.

    Of course, one could argue that central banks should not stop doing their job, but “this is the world we live in” arguments do carry some weight.

  4. Grim23

     /  May 9, 2013

    Thanks for the link, interesting stuff!
    I am in the middle of posting a long reply. I have to wait another 2 hours to post the last bit because of forum rules. It’s quite long, so if you like you could use that as the guest post? Just maybe edit out the bits that make it look like a reply, and make it look like its own post. It pretty much is anyway.

  5. I think the counter factual is important here. If rates are positive, but need to drop, then either the reserve bank or fiscal policy or both can bring about the correct rate. It doesn’t have to be the reserve bank, but it might as well be.

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