Understanding Macroeconomics and US Relations in Australia

A money printing press in the Currency Museum.

Historic advertisements in the RBA Board Room.

On Friday, January 7 we visited both the American Consulate and the Reserve Bank of Australia (RBA).  The Consulate’s Economic Officer, Chris Corkey, spoke about relations between Australia and the United States.  According to our handout, the United States Consulate General in Sydney is responsible for representing American interests and assisting U.S. citizens in New South Wales and Queensland.  The Consulate is the eyes and ears of Washington, DC around the world.  At the Reserve Bank, we heard from Richard Finlay, Senior Economist.  He spoke about the RBA’s functions, history, and monetary policy as well as Australia’s current macroeconomic performance.  After his lecture, we toured the Currency Museum and saw the evolution of Australian currency over the years. 

According to the RBA’s website, monetary policy is the management of interest rates to achieve short term policies.  The RBA achieves monetary policy goals through changing the cash rate (market interest rate on overnight funds), which leads to changes in other interest rates in the market.  Australia has only experienced one quarter of economic downturn during the recent global financial crisis.  According to a policy brief article in the course packet, Australia was the first G20 country to raise interest rates in the midst of the financial crisis in response to emerging inflation risks. 

American interest rates are currently near zero, with the aim of inducing borrowing and spending to stimulate our weak economy.  Richard Finlay explained to us that currently, the Australian economy is quite strong, so its interest rates are high.  According to an RBA monetary policy graph in the course packet, high interest rates tend to curb inflation.  One reason for this is because businesses are not willing to borrow and expand operations.  Since the Reserve Bank aims to keep an average inflation rate of 2-3 percent over the business cycle, high interest rates conform to this goal of low inflation.

According to the “Australian Exports and Developing Asia” Reserve Bank of Australia article, export shares of mining, education, and tourism have changed during the period of 2000 to 2007.  Coal and metal ores and minerals have increased from 16.2% to 26.7% of total exports from 2000 to 2007.  Education has increased from 2.9% to 5.9% while tourism has declined from 7.2% to 5.4%.  The growth in Australia’s coal export volumes is quite large, but it is modest in comparison to the huge increase in demand of coal from Asian countries such as China.    

Richard explained to us some differences between the Australian Central Bank and the United States Federal Reserve System.  One of the current differences between the two entities is the ease of setting interest rates.  The Australian economy is stronger, making the job of setting interest rates easier.  The United States Federal Reserve System’s job is much more difficult because interest rates cannot go much lower than they already are. 

Another difference between the Reserve Bank of Australia and the United States Federal Reserve System is the composition of their Boards of Directors.  The Australian Board of Directors is made up of the Governor, Deputy Governor, and the Secretary of the Treasury.  Six external members include one academic and five others representing major sectors of the economy, such as coal mining, steel manufacturing, and building materials.  These external members provide firsthand knowledge of the business world.  On the other hand, the United States Federal Reserve Board of Directors is made up of one president from each district of the bank.  Since all of the directors are bankers, the board is more concentrated on finance.  

Moving on to the American Consulate, Chris told us that the relationship between United States – Australia is a model that other countries want to replicate.  This relationship is based upon the ANZUS treat of 1951.  Australia was the first country to send troops when America began Operation Iraqi Freedom. 

According to the summary article in our course pack, the 2004 Free Trade Agreement between the United States and Australia was significant because more than 99 percent of U.S. exports to Australia could be sold without a customs tariff.  U.S. manufacturers benefited because it was estimated to result in $2 billion per year in increased U.S. exports.  This agreement relates to the wine-making industry because it will eliminate tariffs on Australian wine exported to the United States, making the wine-making industry more profitable to Australia.     

Our visit to the Reserve Bank of Australia.