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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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References

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  1. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  2. Smets, Frank & Wouters, Rafael, 2004. "Forecasting with a Bayesian DSGE Model: An Application to the Euro Area," CEPR Discussion Papers 4749, C.E.P.R. Discussion Papers.
  3. Alejandro Justiniano & Bruce Preston, 2008. "Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?," NBER Working Papers 14547, National Bureau of Economic Research, Inc.
  4. Bacchetta, Philippe & van Wincoop, Eric, 2003. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," CEPR Discussion Papers 3808, C.E.P.R. Discussion Papers.
  5. 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.
  6. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
  7. Leon Berkelmans, 2005. "Credit and Monetary Policy: An Australian SVAR," RBA Research Discussion Papers rdp2005-06, Reserve Bank of Australia.
  8. Boivin, J. & Giannoni, M., 2007. "DSGE Models in a Data-Rich Environment," Working papers 162, Banque de France.
  9. Soderlind, Paul, 1999. "Solution and estimation of RE macromodels with optimal policy," European Economic Review, Elsevier, vol. 43(4-6), pages 813-823, April.
  10. Álvarez, L. & Dhyne, E. & Hoeberichts, M. & Kwapil, C. & Le Bihan, H. & Lünnemann, P. & Martins, F. & Sabbatini, R. & Stahl,H. & Vermeulen, P. & Vilmunen, J., 2005. "Sticky Prices in the Euro Area: A Summary of New Micro Evidence," Working papers 138, Banque de France.
  11. 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.
  12. Timothy Kim & Kirdan Lees & Philip Liu, 2006. "Uncovering the Hit-list for Small Inflation Targeters: A Bayesian Structural Analysis," Reserve Bank of New Zealand Discussion Paper Series DP2006/09, Reserve Bank of New Zealand.
  13. Pierpaolo Benigno, 2008. "Price stability with imperfect financial integration," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  14. Giancarlo Corsetti & Paolo Pesenti, 2009. "The Simple Geometry of Transmission and Stabilization in Closed and Open Economies," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 65-116 National Bureau of Economic Research, Inc.
  15. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  16. 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.
  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. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  19. Michael Woodford, 2001. "Imperfect Common Knowledge and the Effects of Monetary Policy," NBER Working Papers 8673, National Bureau of Economic Research, Inc.
  20. 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.
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Citations

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Cited by:
  1. Dungey, Mardi & Osborne, Denise, 2013. "International Transmissions to Australia: The Roles of the US and Euro Area," Working Papers 17208, University of Tasmania, School of Economics and Finance, revised 16 Oct 2013.
  2. Yan Sun, 2011. "From West to East," IMF Working Papers 11/120, International Monetary Fund.
  3. Jarkko P. Jääskelä & Kristoffer Nimark, 2011. "A Medium-Scale New Keynesian Open Economy Model of Australia," Working Papers 588, Barcelona Graduate School of Economics.
  4. Ken Kuttner & Tim Robinson, 2008. "Understanding the Flattening Phillips Curve," Department of Economics Working Papers 2008-15, Department of Economics, Williams College.
  5. 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.
  6. Philip Liu, 2008. "The Role of International Shocks in Australia’s Business Cycle," RBA Research Discussion Papers rdp2008-08, Reserve Bank of Australia.
  7. Jeremy Lawson & Daniel Rees, 2008. "A Sectoral Model of the Australian Economy," RBA Research Discussion Papers rdp2008-01, Reserve Bank of Australia.
  8. Kristoffer Nimark & Jarkko Jääskelä, 2008. "A medium-scale open economy model of Australia," Economics Working Papers 1210, Department of Economics and Business, Universitat Pompeu Fabra.
  9. 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.
  10. 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.
  11. 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.
  12. Harding, Don & Negara, Siwage, 2008. "Estimating baseline real business cycle models of the Australian economy," MPRA Paper 33556, University Library of Munich, Germany.

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