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A Structural Model of Australia as a Small Open Economy

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  • Kristoffer Nimark

    (Reserve Bank of Australia)

Abstract

This paper sets up and estimates a structural model of Australia as a small open economy using Bayesian techniques. Unlike other recent studies, the paper shows that a small micro-founded model can capture the open economy dimensions quite well. Specifically, the model attributes a substantial fraction of the volatility of domestic output and inflation to foreign disturbances and matches the evidence from reduced-form studies. In addition, the model relies much less than other estimated models on a persistent shock to the risk premium to explain changes in the nominal exchange rate. The paper also investigates the effects of various exogenous shocks on the Australian economy.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2007-01.

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Date of creation: Feb 2007
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Handle: RePEc:rba:rbardp:rdp2007-01

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Keywords: small open economy; Australia; Bayesian methods;

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  1. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  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. Söderlind, Paul, 1998. "Solution and Estimation of RE Macromodels with Optimal Policy," Working Paper Series in Economics and Finance 256, Stockholm School of Economics.
  4. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  5. Álvarez, Luis J. & Dhyne, Emmanuel & Hoeberichts, Marco & Kwapil, Claudia & Le Bihan, Hervé & Lünnemann, Patrick & Martins, Fernando & Sabbatini, Roberto & Stahl, Harald & Vermeulen, Philip & Vilmu, 2006. "Sticky prices in the euro area: a summary of new micro evidence," Discussion Paper Series 1: Economic Studies 2006,02, Deutsche Bundesbank, Research Centre.
  6. Timothy Kam & Kirdan Lees & Philip Liu, 2006. "Uncovering The Hit-List For Small Inflation Targeters: A Bayesian Structural Analysis," ANU Working Papers in Economics and Econometrics 2006-473, Australian National University, College of Business and Economics, School of Economics.
  7. Jean Boivin & Marc Giannoni, 2006. "DSGE Models in a Data-Rich Environment," NBER Technical Working Papers 0332, National Bureau of Economic Research, Inc.
  8. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  9. Alejandro Justiniano & Bruce Preston, 2006. "Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?," 2006 Meeting Papers 479, Society for Economic Dynamics.
  10. Benigno, Pierpaolo, 2001. "Price Stability with Imperfect Financial Integration," CEPR Discussion Papers 2854, C.E.P.R. Discussion Papers.
  11. Leon Berkelmans, 2005. "Credit and Monetary Policy: An Australian SVAR," RBA Research Discussion Papers rdp2005-06, Reserve Bank of Australia.
  12. Frank Smets & Raf Wouters, 2004. "Forecasting with a Bayesian DSGE Model: An Application to the Euro Area," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 841-867, November.
  13. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  14. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1069-1087, May.
  15. Giancarlo Corsetti & Paolo Pesenti, 2005. "The Simple Geometry of Transmission and Stabilization in Closed and Open Economies," NBER Working Papers 11341, National Bureau of Economic Research, Inc.
  16. Eric van Wincoop & Philippe Bacchetta, 2003. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," NBER Working Papers 9498, National Bureau of Economic Research, Inc.
  17. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  18. 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.
  19. Michael Woodford, 2001. "Imperfect Common Knowledge and the Effects of Monetary Policy," NBER Working Papers 8673, National Bureau of Economic Research, Inc.
  20. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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Citations

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Cited by:
  1. Abbas, Syed Kanwar & Sgro, Pasquale M., 2011. "New Keynesian Phillips Curve and inflation dynamics in Australia," Economic Modelling, Elsevier, vol. 28(4), pages 2022-2033, July.
  2. Jarkko P. Jääskelä & Kristoffer Nimark, 2011. "A Medium-Scale New Keynesian Open Economy Model of Australia," Working Papers 588, Barcelona Graduate School of Economics.
  3. Ken Kuttner & Tim Robinson, 2008. "Understanding the Flattening Phillips Curve," RBA Research Discussion Papers rdp2008-05, Reserve Bank of Australia.
  4. Jarkko Jääskelä & Kristoffer Nimark, 2008. "A Medium-scale Open Economy Model of Australia," RBA Research Discussion Papers rdp2008-07, Reserve Bank of Australia.
  5. Yan Sun, 2011. "From West to East: Estimating External Spillovers to Australia and New Zealand," IMF Working Papers 11/120, International Monetary Fund.
  6. Mariano Kulish & Daniel Rees, 2008. "Monetary Transmission and the Yield Curve in a Small Open Economy," RBA Research Discussion Papers rdp2008-03, Reserve Bank of Australia.
  7. Philip Liu, 2008. "The Role of International Shocks in Australia’s Business Cycle," RBA Research Discussion Papers rdp2008-08, Reserve Bank of Australia.
  8. Andrew Hodge & Tim Robinson & Robyn Stuart, 2008. "A Small BVAR-DSGE Model for Forecasting the Australian Economy," RBA Research Discussion Papers rdp2008-04, Reserve Bank of Australia.
  9. Harding, Don & Negara, Siwage, 2008. "Estimating baseline real business cycle models of the Australian economy," MPRA Paper 33556, University Library of Munich, Germany.
  10. Jeremy Lawson & Daniel Rees, 2008. "A Sectoral Model of the Australian Economy," RBA Research Discussion Papers rdp2008-01, Reserve Bank of Australia.
  11. Philip Liu, 2007. "Stabilizing The Australian Business Cycle: Good Luck Or Good Policy?," CAMA Working Papers 2007-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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