GOVERNMENT POLICY

Jawboning - Australia's Alternative Macroeconomic Policy

Insights

What Has Happened?

Australia’s well organised macroeconomic policy stance expressed via the unison between Fiscal and Monetary Policies and the effectiveness of the RBA in regulating the economy through its policy tools, are largely responsible for the 28 consecutive years of economic growth the domestic economy experienced before the current recessionary period.

 

However, one repeated criticism for Monetary Policy is its limited impact ruled by interest rate levels. The responsiveness of monetary policy to exogenous shocks is dependent on the cash rate level at that time. 


In 2007, Australia’s cash rate reduced from 7.25% pre GFC to 3% in June 2009. This, amongst other trade, foreign relation and fiscal policy factors, allowed for Australia to maintain positive economic growth and unemployment below 10% during the GFC ‘credit crunch’.  Comparatively, the RBA has set the interest rates at a historic low 0.25% and thus, monetary policy is limited in its responsiveness to worsening economic conditions. Simply put, there is no more wiggle room for the RBA to stimulate the economy through conventional monetary policy tools. 

 

Jawboning is an alternative ‘unconventional’ monetary policy tool available to the RBA, and works through the influence of leading economic officials. Especially in a period of dramatic uncertainty, Jawboning is how ‘public statements made by our officials influence economic activity and the exchange rate’. This tactic was actively used by former RBA governor Glenn Stevens and current governor, Phillip Lowe, has used this strategy to enact favourable economic ‘shifts’, particularly in the exchange rate without any actual policy changes. The ability to influence the AUD currency is particularly useful as it has dramatic ‘strategic’ impacts on key economic metrics like inflation, exports and imports, whilst also influencing financial market activities, importantly focussed around the Australian Share Market (ASX)

Jawbone tracker: How the RBA is talking down the dollar
extracted from the SMH, this graph tracks how Jawboning influences the AUD currency. In the case the economy is operating at point B, which is harmful for uncompetitive sectors who are hampered by low export volumes and an appreciating currency, key officials may introduce the prospect of a currency depreciation to enact real world changes driven by investor sentiment, therefore 'speaking changes into existence' to strategically support economic sectors.

Syllabus Links

Exchange rate fluctuations favouring economic activity

Jawboning’s largest impact comes from its ability to impact exchange rates, which as mentioned, has a ripple effect through the economy. Because the exchange rate is so heavily invested in two factors; Sentiment and the Herd Mentality, shifts in perception can have fast and noticeable impacts on the Australian Dollar.

This is reflected by Phillip Lowe’s public announcement of a potential cut in interest rates in response to a weakening economy in the first quarter of 2019. During this period, manufacturing had fallen to its lowest export volumes since 1980, comprising less than 10% of exports, whilst economic growth with sluggish and below the 3-4% growth levels targeted by the RBA. Financial markets had long expected an increase in the cash rate, but now that Lowe announced that a decrease was a possibility, this caused a rapid 1.8% depreciation in the exchange rate over 24 hours.

A potential cash rate slash under expansionary monetary policy ignited currency change due to interest rate differentials and the effects of carry trade. By reducing the domestic interest rate, investors will gain a lower yield on savings and investments. However, they will increase borrowing in Australian dollars where it is cheaper, and then exchange the AUD currency for other currencies like the USD, who exhibit higher interest rates and stronger returns. This effectively results in a decrease in the demand for AUD, and an increase in the Supply of AUD, as investors ‘flee’ to more attractive currencies.

Despite impacts on imported inflation, which is critical as Australian firms have a high reliance upon imported intermediate goods for business operations, the currency depreciation was highly beneficial and premeditated by the RBA; A depreciating currency increases import costs and therefore encourages greater domestic expenditure on locally produced goods and services. Further, exports become cheaper on the global market, increasing aggregate demand through both Consumption and Exports, kickstarting the economy.

an Increase in Aggregate demand leading to an increase in the equilibrium level of quantity (Q1) and price level (P2). A depreciating exchange rate will always favour domestic exporting firms, but will conversely impact firms which rely on imports for production/economic profits.

However, note that the RBA is not at all concerned with the exchange rate and its microeconomic impact of businesses UNLESS it drastically impacts long term economic performance, or the fundamental goals of the RBA. The central bank has only intervened once in the last decade on the FOREX market through 'dirtying the float' (2008), and jawboning is not used to determine favourable currency levels for the economy.

The exchange rate just happens to be an effective 'conduit' through which jawboning can be conducted.

Overcoming Monetary Policy limitations

Jawboning sentiment grants the RBA some control over monetary policy in a situation where it has limited authority due to an extremely low cash rate. without considering the terrifying prospects of negative interest rates or excessive quantitative easing, Jawboning is potentially the most effective short term way the RBA can control economic growth, inflation and employment to extinguish societal panic.

In 2016, the Australian financial markets, and the economy more broadly, had a terrible start - by February 2016, investor sentiment was creating significant market volatility. Because the stock market is an influential ‘figure’ in consumer and investor perceptions, Both Governor Glenn Stevens and his assistant, Malcolm Edey were able to “sooth” speculation by cautioning investors against “excessive focus on recent market movements” and promising stable interest rates to avoid a currency drop.

In the days following this apparent internal stability, the S&P ASX 200 index rose by 2%, reflecting the heavy influence jawboning has on controlling the economy and its key indicators. Often, leaders will ‘jawbone sentiment’ in order to reap strategic benefits – in this 2016 case, it was prolonged economic confidence and increased consumption and investment which was essential to help pick up the economy after a slow start, through Aggregate Demand Growth. 

Jawboning is also a positive monetary policy tool because it can provide real economic changes with no actual policy changes. Despite a quick implementation lag, monetary policy suffers a longer impact time lag of 6-12 months compared to fiscal policy, which means key monetary policy decisions are often predictive and made ahead of time using modelling.  Thus, changes in macroeconomic policy sometimes cannot be adequately addressed in a timely manner through conventional monetary practices. Jawboning provides a quick solution to offer stability and stimulate either growth or encourage pessimism as a temporary fix to rapid economic changes, which has never been more important than in our current dynamic financial landscape.

graphical representation of monetary policy lag. Jawboning counteracts the long impact time lag inherent to monetary policy, as it provides real economic changes in the present.


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