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A Medium-Scale New Keynesian Open Economy Model of Australia

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  • Jarkko P. Jääskelä
  • Kristoffer Nimark

Abstract

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.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 588.

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Date of creation: Mar 2011
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Handle: RePEc:bge:wpaper:588

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Keywords: New Keynesian open economy; Bayesian estimation; DSGE models; Australian Business cycle;

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  1. Yu-Chin Chen & Kenneth Rogoff & Barbara Rossi, 2008. "Can Exchange Rates Forecast Commodity Prices?," NBER Working Papers 13901, National Bureau of Economic Research, Inc.
  2. Frank Schorfheide & Marco Del Negro, 2007. "Forming Priors for DSGE Models (and How It Affects the Assessment of Nominal Rigidities)," 2007 Meeting Papers, Society for Economic Dynamics 283, Society for Economic Dynamics.
  3. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  4. Kristoffer Nimark, 2007. "A Structural Model of Australia as a Small Open Economy," RBA Research Discussion Papers, Reserve Bank of Australia rdp2007-01, Reserve Bank of Australia.
  5. David Altig & Lawrence J. Christiano & Martin Eichenbaum & Jesper Linde, 2004. "Firm-specific capital, nominal rigidities and the business cycle," Working Paper Series, Federal Reserve Bank of Chicago WP-05-01, Federal Reserve Bank of Chicago.
  6. Daniel Buncic & Martin Melecky, 2008. "An Estimated New Keynesian Policy Model for Australia," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 84(264), pages 1-16, 03.
  7. Alejandro Justiniano & Bruce Preston, 2009. "Can structural small open economy models account for the influence of foreign disturbances?," Working Paper Series, Federal Reserve Bank of Chicago WP-09-19, Federal Reserve Bank of Chicago.
  8. Mardi Dungey & Adrian Pagan, 2009. "Extending a SVAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 85(268), pages 1-20, 03.
  9. Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, Elsevier, vol. 115(2), pages 293-346, August.
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Cited by:
  1. David Norman & Anthony Richards, 2012. "The Forecasting Performance of Single Equation Models of Inflation," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 88(280), pages 64-78, 03.
  2. Malikane, Christopher & Ojah, Kalu, 2014. "Fisher's Relation and the Term Structure: Implications for IS Curves," MPRA Paper 55553, University Library of Munich, Germany.

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