The Macroeconomy

Twenty years ago a panel of distinguished North American economists provided a wideranging 'view from the North' of the Australian economy. With respect to macroeconomic policy discussion, they identified the four most important contemporary issues as being the emergence ofa 'real wage overhang' and its consequent effects in the labour market; the scope for fiscal policy to stimulate aggregate demand; the macroeconomic effects of a resources boom; and the interaction between monetary and exchange-rate policy.

A brief review of macroeconomic developments in the decade before 1983 is helpful to understand the importance of these four issues. For example, from March 1972 to March 1983, the unemployment rate rose from 2.4 to 9.7 per cent, leading many to question the relative importance of deficient demand and excessive real wage growth in labour-market outcomes. Interest in the role of countercyclical fiscal policy was intensified because of the deep recession in the early 19805 gross domestic product (GDP) in December 1982 was 3 per cent lower than a year earlier. The terms of trade rose by 30 per cent in the early 1970s, only to fall back to their original level by 1977. The last of the four issues -the interaction of monetary and exchange-rate policy -had recently been thrust to centre stage by the decision to float the Australian dollar in March 1983.

In Australia, as elsewhere, macroeconomic debate and research interests are driven by events as well as building on earlier research. This is no less true over the two decades reviewed in this chapter than it was in 1983. The four sections that followdealing with the evolution of the current account deficit and foreign indebtedness; monetary policy; fiscal policy; and measures of equilibrium unemployment are necessarily a selective view of the wide range of macroeconomic research in Australia. Important contemporary policy issues have motivated the choice, and each section includes a brief account of historical developments.