The Resources Boom and Economic Policy in the Long Run

Australia's current resources boom has three elements: high terms of trade, strong investment and increased resource exports. For a decade, the net effect has been strongly positive: the boost to incomes and activity from the first two has more than offset the impact of the high Australian dollar. But, both resource investment and the terms of trade will fall in due course and the economy will face a major deflationary shock. A sustained policy response will be needed that recognises the limits of monetary policy and hence involves fiscal stimulus, together with innovative approaches to ensure that infrastructure investment rises rapidly.