A Structural Model of Australia as a Small Open Economy

We estimate a new Keynesian open economy dynamic stochastic general equilibrium model of Australia with a large number of shocks, frictions and rigidities, matching a large number of observable time series. We find that both foreign and domestic shocks are important drivers of the Australian business cycle. We also find that the initial impact on inflation of an increase in demand for Australian commodities is negative, because of an improvement in the real exchange rate, although there is a persistent positive effect on inflation that dominates at longer horizons.

Section: Resultsmentioning

confidence: 99%

“…Some work has been done on constructing DSGE models for Australia, with examples being Buncic and Melecky (2008) and Nimark (2009). These are relatively small-scale models.…”

Section: Introductionmentioning

confidence: 99%

A Medium-Scale New Keynesian Open Economy Model of Australia

Jääskelä

Nimark

2011

“…Economists interested in understanding and modelling developments such as those listed above have access to a number of dynamic stochastic general equilibrium (DSGE) models of the Australian economy. Buncic and Melecky () and Nimark () estimated small‐scale DSGE models, largely for the purpose of examining the dynamic effects of monetary policy shocks. More recently, Jääskelä and Nimark () constructed a medium‐scale DSGE model that includes physical capital as well as a large number of shocks and frictions and was used for several years for forecasting and scenario analysis at the Reserve Bank of Australia (RBA).…”

Section: Introductionmentioning

confidence: 99%

A Multi‐sector Model of the Australian Economy

Rees

Smith

Hall³

2016

This paper describes the dynamic stochastic general equilibrium (DSGE) model currently in use at the Reserve Bank of Australia. The model extends previous DSGE models of the Australian economy by incorporating multiple production sectors, including a resource sector. We estimate the model, describe its dynamic properties, illustrate its use in scenario analysis and use it to identify the sources of Australian business cycle fluctuations.

“…In the case of Australia, Dungey (2002) estimates a structural vector autoregression (SVAR) model, which implies that international factors account for 32 per cent of output forecast errors over a 1-year horizon, whereas gross domestic product (GDP) shocks remain the dominant contributor. However, using an estimated New Keynesian dynamic stochastic general equilibrium (DSGE) model, Nimark (2007) concludes foreign shocks explain over 50 per cent of the variance in Australian output around its trend whereas domestic output shocks account for only 8 per cent. However, using an estimated New Keynesian dynamic stochastic general equilibrium (DSGE) model, Nimark (2007) concludes foreign shocks explain over 50 per cent of the variance in Australian output around its trend whereas domestic output shocks account for only 8 per cent.…”

Section: Introductionmentioning

confidence: 99%

The Effects of International Shocks on Australia's Business Cycle*

Liu

2010

This article examines the sources of Australia's business cycle fluctuations. The cyclical component of gross domestic product is extracted using the Beveridge-Nelson decomposition and a structural Vector autoregressive model (VAR) model is identified using robust sign restrictions derived from a structural small open economy model. In contrast to previous VAR studies, international factors are found to contribute to over half of the output forecast errors whereas demand shocks have relatively modest effects.