Policymakers need to look beyond low interest rates for ways to encourage economic growth, including worthwhile infrastructure projects, the Reserve Bank Governor Glenn Stevens says.
Despite interest rates at or near zero in the major economies, it is undeniable that monetary policy alone has been unable to produce economic growth at the desired pace, Mr Stevens said in a speech in New York on Tuesday.
That may be because the global economy is going through an extended cyclical downturn, or it could be related to some more deep-seated structural problems.
"Either way, though, policies that encourage growth through means other than just ultra-cheap borrowing costs are surely needed," he said.
He canvassed the idea of so-called "helicopter money", whereby a cental bank would simply give money to private individuals or businesses, or to governments which would then spend it.
"The main complication is surely that it would be a lot easier to start doing helicopter money than to stop, if history is any guide," he said.
Direct central bank financing of government spending was either frowned on or against the law in many countries.
In Australia, it was formally ended in 1987 in an exchange of letters between the Reserve Bank and the Treasury.
"It would be a very large step to overturn those taboos, which exist for good reason," Mr Stevens said.
Desperate problems call for desperate measures, Mr Stevens said, but he questioned whether the situation had become so desperate.
"Before we even got close to that point, one would have thought that for many governments today there must still be projects of an infrastructure kind that would, through conventional fiscal operations at current bond rates, offer returns comfortably above their cost of funding," he said.
"Helicopter money is surely not needed in these cases."
Either way, the mere fact that such actions are being openly talked about emphasised the point that the limits of central bank policy in boosting growth are being reached, Mr Stevens said.
Central banks have been clever in finding new ways to lower interest rates a bit further.
"But surely diminishing returns are setting in," he said.
"My suspicion is that more and more people realise this."
But even if there has been some structural downward shift in the achievable rate of growth - possibly caused by excessive debt, limits to productivity growth, or demographic factors like the ageing population - some things could still be done to improve the outlook.
They include improving bank capitalisation, alleviating household debt, improving incentives for productive risk-taking, and smoothing the way for faster productivity growth and the transition to new industries.
The damage from "mood swings" in financial markets could be limited by policies focused on improving economic growth fundamentals, Mr Steven said.
"It is surely time that policies beyond central bank actions did more in this regard."
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