Australian Monetary Policy and Impact of Global Financial Crisis

Australian Monetary Policy and Impact of Global Financial Crisis

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1. Introduction: Australian Monetary Policy and Impact of Global Financial Crisis

The global financial market faced some major stress during the financial crisis in the year 2008. This financial crisis affected the Australian economy less which is the result of the strong economic position in the country. Accordingly, the Australian bank has less subjection to the US banks and the housing market as the policy of the country finds domestic lending much more profitable. However, Australia's economy get back in its position quickly after the GFC situation as a huge amount of resources was being exported to the country China. Accordingly the APRA, corporate regulator, and financial market togetherly worked to return the strength to the lending standards that were effective to make the financial sector more strong.

1.1 Background

Refer to which reflects the situation where the country Australia faced poor liquidity in the case of the exchange rate in the "foreign exchange market". However, the reserve bank in Australia took many steps to stabilize the market liquidity and to make sure that the price adjustment may not be affected due to this situation. Accordingly, it also has been reported that during that time when the crisis of US dollars has been identified in the market, the demand for US dollars mainly come from the side of the European bank, which is also the reason of the arisen problem in the swap market.

1.2 Research rational

The research is coherent to identify the impact of the GFC on Australia's monetary policy and the impact of this on Australia's financial market. However, the change in the exchange rate and the crisis in the financial market also fell an effect on the country's economy which is also considered in this research paper. Accordingly, the steps which have been taken by the Reserve bank during that time to stabilize the financial market condition of the country were also effective to strengthen the economical conditions and financial firms.

1.3 Aim of the research

This research is conducted to identify the impact of the global financial crisis on the country Austrial's economy and financial condition. However, the main aim of this research is to identify the steps which had been taken by the reserve bank of the country to strengthen the financial condition and the impact of the GFC on the financial market of Australia.

1.4 Research objective

The objective of this research is discussed below

• To identify the monetary policy's impact on Australia's economy.
• To identify the impact of GFC in the year 2008 on the financial market and economy of the country Australia.
• To identify the policy which has been taken by the Central bank during GFC.
• To find out the effectiveness of those policies to strengthen the financial market and economy.

1.5 Research question

Based on the research objective the researcher draw up some research question which is discussed below,

• What is the transmission of the monetary policy of the country Australia on its economy?
• What is the impact of the GFC on the financial market and economy of the country of Australia in 2008?
• What are the policies taken by the central bank in the GCF period?
• Did those policies were effective to strengthen the financial and economical condition?

2. Literature review

2.1 Introduction

In this research paper, the researcher has tried to identify the impact of monetary policy on the country Austial's financial market. Accordingly during the GFC the problem in the financial market which has been faced by the country is also discussed in this point based on the secondary data. However, the literature review is an important part of the research paper which gives a detailed understanding of a topic. In this case, this part of the research has a detailed discussion about the monetary policy of the country Australia from the year 2008 to 2014. Accordingly, the impact of the GFC on the financial market of the country is also discussed critically.

2.2 Impact of the monetary policy of the country Australia on its economy

The transmission in monetary policy reflects the situation where the change in the policy of reserve banks is impacted by the financial activity of the country and the rate of inflation. From the viewpoint of the author Kang, Ratti and Vespignani, 2020, a change in the monetary policy of a country depends on the change in the economic factors of the country. However, the monetary policy formulation is the responsibility of the Reserve bank of the country Australia. Accordingly, the change in the policy was taken by the board to stabilize the financial market disruption, for which the "cash rate target" by the reserve bank has been increased over the year. Referring to the interest rate has been increased between 2004 and 2005, however, after the end of 2005 the rate got decreased that reflecting the inflation rate during that period was high.

2.3 Impact of GFC on Australia's financial market and economy

The term GFC refers to the situation where the global financial market came under huge stress, rate of inflation, and other disruption in the financial market of every country has been identified. However, the GFC did not have a huge impact on the financial market of the country of Australia. Accordingly, the change in the country's economy has been identified during that period as the rate of employment and the rate of economic growth were significantly lower than in the other years. Moreover, in comparison with the other country's economies, the impact of the GFC on the country's economy was not that much high as the Australian banks were less subjection to the bank and housing market of the US (rba.gov.au, 2023). Moreover, the thought of the country investing in the domestic product was also the reason which was supported the stability in the financial market of the country. However, the monetary policy of the country shows that the investment in the own domestic product is much more profitable and creates less risk. According to that a huge resource of the country Australia was exported to China which is the main reason that the economy of the country Australia rebounded quickly. However, this GFC has not only to fall an impact on the financial market but also fall a negative impact on the economy of the country. In that year a lower employment rate and a higher inflation rate had been identified.

2.4 Policies which had been taken by the Central bank during the GFC to reduce the impact of the crisis

There is no doubt that the GFC did not only impact the economy of the country the US, but it also impacted the global financial market. During that period to control the disruption in the financial market the Central Bank made changes in many policies to stabilize the economical condition of the country. Firstly reduction in the interest rate is the most effective decision of the Central bank for which a huge amount of money had lent to the banks and other financial firms to stabilize their financial condition (rba.gov.au, 2023). Accordingly, during that period the government increase its spending in the economy and started to buy bonds from the bank to financially strengthen them. Moreover, the decision of purchasing ownership stakes in many banks and financial institutes is one of the valuable decisions of the Central bank which also reduces the chance of bankruptcy of the financial firms.

2.5 Effectiveness of those policies to strengthen the financial market and economy

The Australian financial position and the economy have not been too much impacted during that period, however, there are some little bit of effects of this GFC on the country's economy. The economy of the country Australia was no doubt in a better position before the GFC, but after the situation arose the economy of the country felt a shock in its economic growth which resulted in a reduction in the GDP rate. However, there is a lower impact has been identified on the economic growth of the country Austalia's GDP as the country is not so involved with the US bank (rba.gov.au, 2023). Moreover, the change in the policy by the Central Bank is considered to have a positive impact on the financial condition of the global financial market. However, the government policy to buy the stack of many financial firms and banks was also effective to stabilize the financial condition of the banks and firms, which also reduce the chance of bankruptcy.

2.6 Literature gap

The current research has some restrictions due to time and narrow resources and this analysis is completed using secondary resources. Future research is needed for collecting more proof and sources that more clearly explained the Australian Monetary Policy. However, there are fewer articles and journals which show the actual impact of this GFC in the year 2008 on the country Australia's economy. Accordingly, the change in the monetary policy of the country during that period to reduce the impact of the GFC cannot be identified, which also creates limitations in the research.

2.7 Summary

The literature has a critical discussion about the monetary policy's transmission on the Australian economy. Accordingly, the GFC in the year 2008 which impacted the global financial market and every country's economy is also discussed in this part of the research. However, to reduce the impact of this GFC on the global economy the taken step of the Central Bank and its effectiveness to reduce the impact is also identified in this point. Moreover, the stability in the country Australia's financial market and the lower exposure with the US banks and the housing market show the country's thought of domestic investment is also identified. According to that the change in the policy by the central bank was also effective to stabilize the global financial market condition during that period.

3. Methodology

3.1 Philosophies

Research philosophy involves a review of several aspects, including the nature of truth, the role of the researcher, the techniques used to collect and research data, and the ethical concerns involved in conducting research. There are several different research perspectives, each with its own set of beliefs and practices. Some common research perspectives include “positivism, interpretivism, and critical realism”. Each of these methods has its strengths and weaknesses and may be more suitable for certain types of research questions or environments (Clarida, 2020). Finally, the research philosophy chosen by a researcher will have an important impact on the research design, methodology, and interpretation of findings, and it is significant for researchers to carefully consider their philosophical beliefs and their implications for their research. The “positivism” method has been used in this research.

3.2 Design

The research design refers to the overall plan or strategy used to conduct research and answer research queries. It involves making conclusions about the type of research method to be used, the sources of data to be utilised, and the methods to be observed in collecting and analyzing data. “Explanatory Research Design” has been used in this research design. However, this research design helps to predict forthcoming happenings.

3.3 Data collection

Data collection is an important step in the research methodology, where data is gathered from various sources to answer research questions or purposes. The process of data collection involves gathering relevant information, and statements from primary or secondary sources. In research, data collection methods can be largely organised into two types one of them is “primary data collection” and “secondary data collection”. Primary data collection contains collecting data directly from sources through surveys, discussions, comments, investigations, or focus classes. Secondary data collection involves assemblage data from existing authorities, such as “literature reviews”, databases, reports, or journals (Mayer, 2019). The selection of data collection methods relies on the research purposes, research inquiries, sample size, availability of resources, and other factors. The quality and precision of data collected are crucial in ensuring the validity and reliability of research findings. Therefore, researchers must choose proper data collection methods and ensure that the collected data is trustworthy and relevant to their research questions. In this research collection, the data are collected from the news, articles books and journals.

3.4 Research method

Research methods are mainly the research strategy and techniques for collecting the research data. Two types of research methods are mostly used in research strategy. One of them is Qualitative Techniques and another one is Quantitative Techniques (Aspers and Corte, 2019). In this research paper, qualitative techniques have been used, this technique has established the rate of the spectacle. Qualitative research methods are flexible and provide quick results to the researcher.

3.5 Data analysis

Data analysis is mainly the process of data transformation and data modelling. Thematic data analysis has been used in this research. The meaning of thematic data analysis is examining qualitative data. In this research analysis, the researchers closely identify the common themes and ideas which are reached frequently.

4. Data analysis

4.1 Volatility in the global stock market and commodity prices and effect on the countries

GFC was a huge impact on the global stock market which subjected many disruptions in the country's financial and economic factors. Besides the country Australia, the other 11 countries faced volatility in the stock market during that period and a huge differentiation in industrial production. In the country, Brazil 16% volatility in the stock market had been identified during the GFC in the year 2008, whereas in the country Ireland, this percentage was around 15% (Kang, Ratti and Vespignani, 2020). It was also been recorded that the shock in the stock market and the financial market continued for 12 months. However, the crisis which mainly arises from the country's "US housing market" resulted in deceased in the industrial production of the country. According to that the country Australia had been impacted less during the GFC as the country's less interest and exposure to the "US housing market" and banks. However, this resulted in the country was been stable in its financial position during that period.

4.2 Global financial crisis and the macroeconomic policy

The country Australia's monetary policy is the most effective in stabilizing the financial condition of the country accordingly the policy of the country for less exposure to the US banks is effective to hold the financial condition of the country. However, the collapse of the Lehmann Brothers in the year 2008 resulted in a huge shock to the global economy which also impacted the Australian economy. Moreover, the country the US shared a huge portion of the "international capital inflow" (approx 74%) in the global economy (Makin, 2019). During that period the country faced a huge disruption in its financial condition for which the contribution to the global economy was also haphazard. However, the change in the monetary policy of the country Australia was effective to give support to the bank and other financial firms' financial condition. During that period when banks and other private sectors face problems in their financial position, the government policy to purchase stakes in the banks and financial firms to support them was a valuable decision.

Moreover, the theory of Keynesian in this matter is also identified as during that period the government of Australia applied this policy where government spending in the country's economy has found out. The theory of Keynesian talk about the spending of government as the cohort of the economic growth of a country when a financial crisis has been raised. However, there are also some drawbacks of this theory is also find out during the application of the theory to a country's economy. Firstly the theory can only be applied to a country when the economies of the country are closed. Therefore it can be said that this is not true, as during that period the economy of the country Australia was not closed which can be identified by the export of huge resources to China. Moreover, the quality of spending of the government is not relevant in this case and also the debt of the public is not relevant. Accordingly, the multiplier that is mentioned in this theory is fully dependent on the "Keynesian consumption function".

4.3 Success of the monetary policy in the country Australia during the GFC period

The main cause of the GFC was not only the reason for the change of the credit asset or the collapse of the Lehman Brothers in the year 2008. However, the major reason behind the situation was the price fluctuation in the US housing market which resulted in the disruption in the global financial market. In the past year, the country Australia's banks were mainly dependent on the traditional banking system where the dependency on loans and mortgages was found in the banking sector. Moreover, the country's response in that situation was majorly impacted its financial position after the end of that era. The less dependency of the country on the US housing market and the banks and dependency on domestic investment is the reason that the country faces less disruption in its economy. However, the rate of inflation and unemployment reflects that the country Australia's economy has been impacted less concerning the other country's comical impact by the GFC.

In this context, there are 6 emerging patterns have been identified in this matter which are, "targeting and framing" which reflect the situation where the change or introduction of some government policy has impacted the citizen's life. There are various kinds of policy has been taken by the government during that time such as the "Higher Education Contribution Scheme" which helps students to get loans for their education. Accordingly, the second pattern which is "Ripening, not running" shows the step that has been taken by the Australian government to support the public coherent in the growth of the country's economical and financial situation. Besides that the discussion of the patterns" Champions and stewards", "Strike while the iron is hot", and engineering support is the most effective pattern which shows the government policy is effective to support the financial condition of the country (Bell and Hindmoor,2019.). Moreover, the last pattern which is "implementation, implementation, implementation" reflects the situation where there is some government policy that was not effective to implement in the country's economy. However, there is some theory that shows that the implementation of a policy is well for the country's economy when it is implemented effectively. Therefore from this, it can be said that some policies are implemented by the government of Australia that was not effective for the growth of the country's economy.

Conclusion

The entire conclusion can be drawn based on the “Australian Monteray policy” and its summarized analysis. The research study describes a brief analysis of the Australian Monetary Policy from the year of 2008 to 2014. In the year of 2008, the Australian market faced a financial crisis and it takes a little time to get back to a stable financial position. The estimation of the financial stability of the Australian market has been depicted in the research study. It contains a detailed summarization of the monetary policy of Australia and its accumulated impact on the economy’s performance. It contains the various methods that have helped the researcher in analyzing the performance of the Australian economy and make its equal impact on the changes that are effectively brought down by the changes in the financial market. The effectiveness of the monetary policy of the country Australia can be identified by the less dependency of the country's economy on the "US housing market" and the bank.During the period of GFC when the global economy was shocked by the collapse of the Lehman Brothers in the country the US, which resulted in a disruption in many countries' economies and financial conditions. The description of the GFC and changes in the regulations have been described in the research study with an overall theoretical discussion and proposed methods that are used by the researcher during the research study. It has effectively described that changes and mandatory regulations which have brought severe price fluctuation in the economy of Australia. The researcher will be using Quantitative Techniques for conducting the research study and making effective research conclusions. The global crises that occurred in the year 2008 have effectively made implications for the performance of the economy. However, the country Australia's policy to strengthen the financial condition of the country was effective in stabilizing the economic condition. Accordingly, the idea of purchasing stakes the banks and other financial firms to give them financial stability is also been identified as beneficial for the financial growth of the country's economy. Moreover, the change in GDP growth reflects the situation that the country has also been impacted by the GFC less than the other countries. In addition, the unemployment rate and the inflation rate are also identified during that situation, therefore it can be said that the global crisis has fallen a negative impact on the economy of the country Australia.

References

Aspers, P. and Corte, U., 2019. What is qualitative in qualitative research? Qualitative sociology, 42, pp.139-160.

Bell, S. and Hindmoor, A., 2019. Avoiding the Global Financial Crisis in Australia: A policy success?. Successful Public Policy, p.279.

Clarida, R.H., 2020. The federal reserve's review of its monetary policy strategy, tools, and communication practices. Cato J., 40, p.255.

Kang, W., Ratti, R.A. and Vespignani, J., 2020. Global commodity prices and global stock market volatility shocks: Effects across countries. Journal of Asian Economics, 71, p.101249.

Makin, A.J., 2019. Lessons for macroeconomic policy from the Global Financial Crisis. Economic Analysis and Policy, 64, pp.13-25.

Mayer, D., 2019. Knowledge, policy and practice in learning teaching in Australia. Knowledge, policy and practice in teacher education: A crossnational study. Bloomsbury Publishing.

Rba.gov.au (2023) Liquidity in the exchange market https://www.rba.gov.au/speeches/2009/sp-ag-310309.html

Rba.gov.au (2023)Cash rate target https://www.rba.gov.au/monetary-policy/about.html

rba.gov.au(2023) Policies of Central Bankhttps://www.rba.gov.au/education/resources/explainers/the-global-financial-crisis.html

Researchgate.net (2023) GDP growth https://www.researchgate.net/figure/Australia-GDP-growth_fig1_318529289