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Estimating baseline real business cycle models of the Australian economy

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  • Harding, Don
  • Negara, Siwage

Abstract

This paper is concerned with the issues that arise in building a small Dynamic Stochastic General Equilibrium (DSGE) model of the Australian economy. Our ultimate objective is to build a model that can be used to study long run economic growth and the business cycle. We agree with Cooley and Prescot�s (1995) view that these are phenomena to be studied jointly rather than separately. Adopting this view has several implications for what constitutes the essential components of our a model. We see these as being: a major role for a persistent technology shock in driving economic activity; and consistency with a version of the Ramsey-Cass-Koopmans (RCK) exogenous growth model. Without the former it is not possible to generate realistic business cycle features; demand shocks alone are insuffcient see Harding and Pagan (2007). The RCK exogenous growth model remains the simplest model available to encompass the salient features of economic growth which is why we rate it as essential. We also take the methodological stance that it is desirable to obtain a satisfactory baseline model before adding other desirable features such as: money; openness to international trade, capital flows, and immigration; and price and wage stickiness. In short we see small real business cycle (RBC) models as the natural starting point for our work.

Suggested Citation

  • Harding, Don & Negara, Siwage, 2008. "Estimating baseline real business cycle models of the Australian economy," MPRA Paper 33556, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:33556
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    File URL: https://mpra.ub.uni-muenchen.de/33556/1/MPRA_paper_33556.pdf
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    References listed on IDEAS

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    1. Kristoffer P. Nimark, 2009. "A Structural Model of Australia as a Small Open Economy," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 42(1), pages 24-41, March.
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    4. Daniel Buncic & Martin Melecky, 2008. "An Estimated New Keynesian Policy Model for Australia," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 1-16, March.
    5. Gary D. Hansen & Edward C. Prescott, 2002. "Malthus to Solow," American Economic Review, American Economic Association, vol. 92(4), pages 1205-1217, September.
    6. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-450, June.
    7. Ruge-Murcia, Francisco J., 2007. "Methods to estimate dynamic stochastic general equilibrium models," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2599-2636, August.
    8. Ireland, Peter N., 2004. "A method for taking models to the data," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1205-1226, March.
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    Cited by:

    1. Daniel M. Rees & Penelope Smith & Jamie Hall, 2016. "A Multi-sector Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 92(298), pages 374-408, September.

    More about this item

    Keywords

    Real business cycle; stochastic growth model; technology shock; persistence;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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