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The Effects of Fiscal Restraint on the Australian Economy as Projected by the Murphy and MSG2 Models: A Comparison

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  • Parsell, Bruce
  • Powell, Alan
  • Wilcoxen, Peter

Abstract

In the aftermath of the rational expectations debate and the onslaught of the New Classical economics, some builders of macroeconometric models have begun to change some of their habits, arguably for the better. In particular, neoclassical discipline is increasingly respected in the formation of the steady states or balanced growth solutions of the latest versions of several models (e.g., Australia's Murphy Model, and the McKibbin-Sachs Global [MSG21 Model). As well, the behaviour of certain variables (especially exchange rates and investment) increasingly tends to be linked to intertemporal optimization. In this paper we report on simulations made with the Murphy and MSG2 models of the effects of an unanticipated cut in government spending lasting for five years. We explain the results largely in terms of the innovative features mentioned above.

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Handle: RePEc:ags:ircipa:295057
DOI: 10.22004/ag.econ.295057
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