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A Simple, Structural, and Empirical Model of the Antipodean Transmission Mechanism

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Author Info
Thomas A Lubik (Reserve Bank of New Zealand)

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Abstract

This paper studies the transmission of business cycles and the sources of economic fluctuations in Australia and New Zealand by estimating a Bayesian DSGE model. The theoretical model is that of two open economies that are tightly integrated by trade in goods and assets. They can be thought of as economically large relative to each other, but small with respect to the rest of the world. The two economies are hit by a variety of country-specific and world-wide shocks. The main findings are that the pre-eminent driving forces of Antipodean business cycles are worldwide technology shocks and foreign, i.e. rest-of-the-world, expenditure shocks. Domestic technology shocks and monetary policy shocks appear to play only a minor role. Transmission of policy shocks is asymmetric, and neither central bank is found to respond to exchange rate movements. The model can explain 15 percent of the observed exchange rate volatility.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2005/06.

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Date of creation: Dec 2005
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Handle: RePEc:nzb:nzbdps:2005/06

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Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Paul R. Bergin, 2004. "How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account?," NBER Working Papers 10356, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  3. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer, vol. 20(1-2), pages 1-20, October. [Downloadable!]
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  4. Thomas Lubik & Wing Teo, 2005. "Do World Shocks Drive Domestic Business Cycles? Some Evidence from Structural Estimation," Economics Working Paper Archive 522, The Johns Hopkins University,Department of Economics. [Downloadable!]
  5. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June. [Downloadable!] (restricted)
  6. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Blackwell Publishing, vol. 69(3), pages 533-63, July.
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  7. Thomas Lubik & Frank Schorfheide, 2003. "Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation," Economics Working Paper Archive 505, The Johns Hopkins University,Department of Economics. [Downloadable!]
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  8. Thomas Lubik & Frank Schorfheide, 2005. "A Bayesian Look at New Open Economy Macroeconomics," Economics Working Paper Archive 521, The Johns Hopkins University,Department of Economics. [Downloadable!]
  9. Ahmed, Shaghil & Ickes, Barry W. & Ping Wang & Byung Sam Yoo, 1993. "International Business Cycles," American Economic Review, American Economic Association, vol. 83(3), pages 335-59, June. [Downloadable!] (restricted)
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  10. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Blackwell Publishing, vol. 72(3), pages 707-734, 07. [Downloadable!] (restricted)
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  11. Robert A Buckle & Kunhong Kim & Heather Kirkham & Nathan McLellan & Jared Sharma, 2002. "A structural VAR model of the New Zealand business cycle," Treasury Working Paper Series 02/26, New Zealand Treasury. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alfred A Haug & Christie Smith, 2007. "Local linear impulse responses for a small open economy," Reserve Bank of New Zealand Discussion Paper Series DP2007/09, Reserve Bank of New Zealand. [Downloadable!]
  2. Keiko Honjo & Ben Hunt, 2006. "Stabilizing Inflation in Iceland," IMF Working Papers 06/262, International Monetary Fund. [Downloadable!]
  3. Buncic, Daniel & Melecky, Martin, 2007. "An estimated New Keynesian policy model for Australia," MPRA Paper 4138, University Library of Munich, Germany. [Downloadable!]
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