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Microeconomic Shocks, Depreciation and Inflation: an Australian Perspective

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    Abstract

    The general equilibrium approach demonstrates that macroeconomic shocks link the exchange rate and the inflation rate through diverse transmission channels. Therefore, the one-track focus of the partial equilibrium 'pass-through' approach that predicts that exchange rate depreciation causes inflation is flawed does not explain the exchange rate inflation dynamics of post-float australia. In this paper based on a mundell-fleming stochastic rational expectations model the theoretical priors that link exogenous shocks and macro-variables such variables real exchange rate, relative prices and relative output have been identified. Thereafter, the structural var (svar) methodology has been deployed to the identify the exogenous shocks by appealing to the long-run classical neutrality postulates. The dynamic interactions between shocks and macro-variables have been empirically reviewed using innovation accounting.

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    File URL: http://espace.library.uq.edu.au/eserv/UQ:11065/DP298Jan02.pdf
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    Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 298.

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    Date of creation: Jan 2002
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    Handle: RePEc:qld:uq2004:298

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    1. Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
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    14. Fisher, Lance A, 1996. "Sources of Exchange Rate and Price Level Fluctuations in Two Commodity Exporting Countries: Australia and New Zealand," The Economic Record, The Economic Society of Australia, vol. 72(219), pages 345-58, December.
    15. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report 107, Federal Reserve Bank of Minneapolis.
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    17. Gali, Jordi, 1992. "How Well Does the IS-LM Model Fit Postwar U.S. Data," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 709-38, May.
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    19. Dwyer, Jacqueline & Lam, Ricky, 1995. "The Two Stages of Exchange Rate Pass-Through: Implications for Inflation," Australian Economic Papers, Wiley Blackwell, vol. 34(65), pages 157-79, December.
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