The debate about whether monetary policy can be an effective (or more effective than fiscal policy) instrument to combat recessions continues. Nick Rowe has a comparative analysis of the relative economic performances since the summer of 2008 (when financial markets froze and recession hit) of three countries with small open-economies and inflation targetting central banks - Canada (2%), New Zealand (2%) and Australia (2.5%).
Since Australia and New Zealand had high interest rates to start with, despite cutting rates aggressively since the second half of 2008, they did not face the Zero Lower Bound (ZLB) in interest rates, whereas Canada (which started with a lower 3% rate cut its rate to 0.25%. While all three were facing inflation rates higher than target in the summer of 2008, they have been brought within target now.
However, in terms of economic growth and unemployment, though Australia did the best, New Zealand did worse than Canada (on both counts) despite not facing the ZLB which constrains central banks from loosening monetary policy any further to boost aggregate demand.
As Nick admitted, his comments section offers more valuable explanations. One important missing element in the story may be the relative importance of the influence of China (and its stimulus spending and rebound in growth) on commodities-rich Australia and US (with its weak demand and ailing financial markets) on the closely integrated Canadian economy. Further, being small economies, all faced (and maybe the impact was greater on resource-poor and import dependent New Zealand) the brunt of the exogenous global economic shocks. And it did not benefit from the anchoring effect of China. And finally, the relative strenghts of the fiscal stimulus spending (which was strong and immediate in Australia, compared to the apparently feeble effort in New Zealand) may have some explanation for the respective economic outcomes.