Limitations of economic policies

Time lags

• Policy lag refers to (and consists of):
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• the time between a change in the stance of a policy and its effects on real eco activity and behaviour

  • (Policy lag = Implementation lag + Impact lag)
    • Implementation lag : time taken for gov to make, change, or introduce new eco policies
    • Impact lag : time taken for a new policy (or change) to have an impact on the economy
      • e.g. for prices or consumption to adjust accordingly

• Policy time lags chart:
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  • Monetary impact takes time to affect borrowing and spending behaviours
    • therefore RBA has to carefully anticipate inflation (‘==pre-emptive monetary policy==’)
      • (2022) RBA delayed raising interest rates (thought inflation was just temporary from covid supply chains)
        • they were wrong → fastest rise in IR since the 2-3% target’s adoption
  • Microeconomic has LONG implementation lag as policies are heavily researched and reviewed before enactment
    • and long ass impact lag

Global influences

• Globalisation and the international business cycle has increased the risks of financial contagion.
  • (Financial crises can spread quickly due to interconnected markets)
• Govs place a high priority on maintaining international investor confidence
• World economic policy :
  • (e.g. set by WTO, APEC) may set boundaries for domestic policies like protection
    • e.g. the WTO forced Aus to abandon its ban on fresh salmon imports from Canada
      • ‘in order to benefit the world economy’
• Interest rate differential:
  • If other countries raise interest rates and Australia doesn’t, foreign investment might be less attractive.

Political constraints

• In Aus, a party must win public support for its policy platform ==in an election every 3 years==

  • to continue microeconomic reform, a Gov must be re-elected

• A bill must be passed by both houses of parliament to become law

  • A gov may not have a majority in both houses, leading to implementation delays in negotiations

• Governments may implement ‘vote-buying’ policies near election times to encourage re-election.

  • (e.g., tax cuts)