Demand management policies play an important role, but they have their limitations. Raising the economy’s potential isn’t just some esoteric concern for economists, or at least it shouldn’t be.
As I mentioned earlier, it is common practice for Australian banks to hedge their foreign currency borrowings with derivatives to insulate themselves and their Australian borrowers from fluctuations in foreign exchange rates and interest rates. The most recent survey of hedging practices showed that around 85 per cent of banks' foreign currency liabilities were hedged (Graph 3).