Is Monetary Policy Too Tight?

Abstract

Monetary policy has steadily become tighter over the past twelve months. In various statements, the Government has indicated its view that monetary policy needs to be tight in order to subdue an ‘excessively high’ rate of growth of domestic demand. This article asks whether the current stance of monetary policy is now too restrictive and, if so, what the consequences might be for the pattern and growth of economic activity during 1989‐90. A number of scenarios based on alternative settings of monetary policy in 1989‐90 are derived from a short‐term simulation model of the Australian economy. The scenarios suggest that, if monetary policy remains at the current degree of tightness, the Austra..