This article summarises developments in the Australian economy in 2020. It describes the economic growth and labour market ramifications associated with COVID‐19, and the fiscal and monetary policies implemented to help counter its effects. COVID‐19 has resulted in considerable slack in an economy that was weak pre‐pandemic. While current policies are appropriately focused on stimulating demand and supporting employment, existing challenges such as weak growth in productivity, gross domestic product and real wages are also likely to remain relevant post‐pandemic.

A time-varying Phillips curve was estimated as a means to examine the changing nature of the relationship between wage inflation and the unemployment rate in Australia. The implied time-varying equilibrium unemployment rate was generated and the analysis showed the important role played by variations in the slope of the Phillips curve in changing the equilibrium unemployment rate. The deviations of actual unemployment rates from the estimated equilibrium unemployment rates also performed remarkedly well as measures of inflationary pressure.

This study implements a procedure to evaluate time‐varying bank‐interest rate adjustments over a sample period which includes changes in industry structure, market and credit conditions and varying episodes of monetary policy. The model draws attention to the pivotal role of official rates and provides estimates of a bank equilibrium policy rate. The changing sensitivity of official rates to banking conditions is identified. Results are also provided for the variation in intermediation margins and pass‐throughs as well as the interactions between lending and borrowing behaviour over the years, including behaviour before, during and after the global financial crisis. The empirical methodology is applied to the US and the Australian banking systems.

Understanding the effects of interest rates on city‐specific house price to household income ratios is important for managing local housing markets. In particular, there is concern that keeping interest rates at sufficiently low levels can distort the relationship between local house prices and fundamentals. We use house price to income ratios across capital cities in Australia to investigate this issue and show that there is a national interest rate ‘transition’ point below which housing dynamics can become unstable. This result lends support to the presence of a duration‐dependent threshold effect (hitherto mainly explored in theoretical models).

This study examines how news is distributed across stocks. A model is developed that categorizes a stock's latent news into normal and nonnormal news, and allows both types of news to be filtered through to other stocks. This is achieved by formulating a model that jointly incorporates a multivariate lognormal-Poisson jump process (for nonnormal news) and a multivariate GARCH process (for normal news), in addition to a news (or shock) transmission mechanism that allows the shocks from both processes to impact intertemporally on all stocks in the system. The relationship between news and the expected volatility surface is explored and a unique news impact surface is derived that depends on time, news magnitude, and news type. We find that the effect of nonnormal news on volatility expectations typically builds up before dissipating, with the news transmission mechanism effectively crowding-out normal news and crowding-in nonnormal news. Moreover, in contrast to the standard approach for measuring leverage effects using asymmetric generalized autoregressive conditional heteroskedasticity models, we find that leverage effects stem predominantly from nonnormal news. Finally, we find that the capacity to identify positively or negatively correlated stock returns is ambiguous in the short term, and depends heavily on the behavior of the nonnormal news component.