Monetary policy is recognised as being less effective as official interest rates approach zero. There are two main reasons. First, spending in Australia on investment is not very responsive to reductions in interest rates. Second, any reduction in official interest rates is mediated by the banks and other financial institutions. For practical reasons deposit rates cannot go below zero so, in order to maintain interest margins banks have to resist reductions in lending rates and that effectively nullifies any impact of reductions in official interest rates.

Key findings:

Monetary policy becomes less effective as official interest rates approach zero, for two main reasons:

1. Spending in Australia on investment is not very responsive to reductions in interest rates.
2. Any reduction in official interest rates is mediated by the banks and other financial institutions. Deposit rates in Australia cannot go below zero so in order to maintain profit margins the banks resist reductions in lending rates which nullifies any impact of reductions in official interest rates.

A more active fiscal policy from government would mean more public spending, such as through increases in Newstart, spending more on health, education, and other public infrastructure.