Last week the Reserve Bank of Australia cut interest rates to zero and said it would pump an extra $100 billion into the economy.
The RBA expects these measures to lower mortgage rates, lower the exchange rate and boost house prices. That, in turn, should boost spending, reduce unemployment and raise inflation.
This is needed because the economy - which was already ailing - has been devastated by the Coronavirus. Unemployment has risen to levels not seen for a generation. Inflation has been below the RBA's target range of 2 to 3 per cent for five years and seems to be falling further.
But has the RBA done enough?
The best way to judge this is to compare the bank's economic objectives with its forecasts. By this standard, the policy measures have been inadequate.
The RBA's main objective is to keep inflation between 2 and 3 per cent. Despite the stimulus, inflation is only projected to reach 1.5 per cent in two years' time.
Monetary policy is also meant to maintain 'full employment', which is estimated to mean an unemployment rate of about 5 per cent. However, the RBA's cuts will not be enough to bring the unemployment rate below 6 per cent.
This suggests a big disconnect between the RBA's actions and their expectations. More aggressive policy would deliver better outcomes - in particular, lower unemployment and higher inflation. It would bring us closer to our objectives.
So the RBA should do more.
When asked why they are not doing more, the RBA's representatives have replied that it has already done an enormous amount. It has cut interest rates to record low levels, expanded the money supply several-fold and introduced several new financial programs.
That is all true. And it would be relevant if the question was whether they deserve applause or congratulations. Let's give them a medal.
But it doesn't answer the question: (to repeat) Why not do more?
It seems as if the RBA is waiting for more information. But exactly what that information might be is unclear. The "wait and see" mentality just leads to our central bank doing too little, too late. As Paul Keating recently observed, the RBA has a culture of indolence.
We already know that expansionary policy would give us better outcomes for unemployment and inflation. An update on how bond purchases are going will not change that. It should stop procrastinating.
The standard tool of monetary policy is to cut the cash rate.
However, with this near zero, the RBA claimed it can fall no further.
These claims are despite substantial evidence, surveyed by the Bank of International Settlements, the European Central Bank, the US Federal Reserve and the International Monetary Fund, that negative interest rates work. The RBA has not explained why it disagrees with the available research.
Instead, the RBA's preferred approach is to buy more bonds. However, this approach is unlikely to work as well in Australia as it has in other countries, given that most of our borrowing is at variable rates.
A more effective option, suggested in 1969 by Nobel-winning economist Milton Friedman, would be a "helicopter drop" of money. Under Australia's current institutions, that means tax cuts financed by selling bonds to the central bank.
This breaches a taboo that some economists have against money-financed fiscal policy, which they fear would be inflationary. However, with inflation below target, that is a feature, not a flaw. Higher expectations of inflation are exactly what we need.
And there are many further options, perhaps the most attractive being to push the exchange rate down.
The prudent approach is to do a bit of everything. Because we are in unfamiliar territory, there is uncertainty for what will work best - if at all. That is an argument for trying them all, not for trying nothing.
The risks of doing too much are small. If stimulus proves to be too effective it can be wound back earlier than planned.
But the risks of doing too little are excessive unemployment and inflation straying further from its target.
Last week Philip Lowe said "if there's a case to do more then we will do it." In the same press conference he said "even with today's policy decision, inflation is too low, and the unemployment rate is too high."
If that is not a case to do more, what is?
- Dr Peter Tulip is Chief Economist at the Centre for Independent Studies and a former RBA senior economist.