Viewer Question #1: What are some limitations of monetary policy?

Limitations of Monetary Policy:

While monetary policy is an essential tool to guide the economy flaws with its efficacy can be observed. A well-known drawback with monetary policy is the time-lag between when the change has occurred and its observable effects on society. You may ask how there can be a time-lag if interest rates can be changed overnight? Well, while it is true that the central bank’s rate has changed it does not necessarily mean that commercial banks will have changed theirs as quickly. The time it takes for public scrutiny to compel them to change may allow weeks to elapse. The bank may also not pass the decrease in interest rate due to their own fear that the economy is not stable and their loans will not be paid back. Also, those who had taken a loan out before will not notice the effects until a few months when there mortgage accrues less interest and they are able to pay less.

In addition, while the theoretical economic understanding that businesses and consumers will immediately invest more when interest rates are low and invest less when interest rates are high this does not necessarily translate to the real world. In time such as these where there is a global pandemic, or another economic disaster people are wary about future changes and are cautious about investments which they can not reverse. It has been stated by the current RBA chief that as Australians are carrying more debt they are less likely to increase their liabilities.

Another limitation is the lack of precision that monetary policy has in solving issues, different states may require economic stimulation while others may be performing extremely well. Currently, the state of Victoria has been suffering with the second stage of coronavirus while Western Australia and Queensland have left the pandemic relatively unscathed. The bluntness of monetary policy may force the government to compliment it with fiscal policy to ensure that those in need are given what is required (JobKeeper, JobSeeker etc).

Finally, a concluding issue with monetary policy are boundaries interest rates have, as interest rates can only go so low. Therefore, in dark times monetary policy may be too subtle and passive method for stimulating the economy. So what's next?Well that's the next question.