How effective is monetary policy in the aftermath of the Global Financial Crisis (GFC), in a world of persistently low interest rates? Our results show that conventional monetary policy is still as effective as before the crisis.
We use three different models to evaluate monetary policy transmission. These models show that a 25 basis point cut in the Official Cash Rate (OCR) leads to an increase in inflation and GDP growth, and that this response is as big today as it was before the GFC. This implies that the recent OCR cuts by the Reserve Bank will lead to – all else equal – higher inflation and GDP growth, and help support maximum sustainable employment (MSE).