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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.

Suggested Citation

  • Kristoffer Nimark, 2007. "A Structural Model of Australia as a Small Open Economy," RBA Research Discussion Papers rdp2007-01, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2007-01
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    References listed on IDEAS

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    Cited by:

    1. Lie, Denny & Yadav, Anirudh S., 2015. "Time-Varying Trend Inflation and the New Keynesian Phillips Curve in Australia," Working Papers 2015-14, University of Sydney, School of Economics.
    2. Kuttner, Ken & Robinson, Tim, 2010. "Understanding the flattening Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 110-125, August.
    3. Jarkko P. Jääskelä & Kristoffer Nimark, 2011. "A Medium‐Scale New Keynesian Open Economy Model of Australia," The Economic Record, The Economic Society of Australia, vol. 87(276), pages 11-36, March.
    4. Sheen, Jeffrey & Wang, Ben Zhe, 2016. "Assessing labor market frictions in a small open economy," Journal of Macroeconomics, Elsevier, pages 231-251.
    5. Harding, Don & Negara, Siwage, 2008. "Estimating baseline real business cycle models of the Australian economy," MPRA Paper 33556, University Library of Munich, Germany.
    6. Daniel Rees & Penelope Smith & Jamie Hall, 2015. "A Multi-sector Model of the Australian Economy," RBA Research Discussion Papers rdp2015-07, Reserve Bank of Australia.
    7. Shuyun May Li & Adam Hal Spencer, 2016. "Effectiveness of the Australian Fiscal Stimulus Package: A DSGE Analysis," The Economic Record, The Economic Society of Australia, vol. 92(296), pages 94-120, March.
    8. Jonathan Kearns & Philip Lowe, 2008. "Promoting Liquidity: Why and How?," RBA Annual Conference Volume,in: Paul Bloxham & Christopher Kent (ed.), Lessons from the Financial Turmoil of 2007 and 2008 Reserve Bank of Australia.
    9. Hugo Gerard & Kristoffer Nimark, 2008. "Combining multivariate density forecasts using predictive criteria," Economics Working Papers 1117, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2008.
    10. 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.
    11. 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.
    12. 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.
    13. Cagliarini, Adam & Robinson, Tim & Tran, Allen, 2011. "Reconciling microeconomic and macroeconomic estimates of price stickiness," Journal of Macroeconomics, Elsevier, pages 102-120.
    14. Nimark, Kristoffer, 2008. "Dynamic pricing and imperfect common knowledge," Journal of Monetary Economics, Elsevier, pages 365-382.
    15. Jarkko Jääskelä & Kristoffer Nimark, 2008. "A Medium-scale Open Economy Model of Australia," RBA Research Discussion Papers rdp2008-07, Reserve Bank of Australia.
    16. Habib, Maurizio Michael & Stráský, Jan, 2008. "Oil exporters: in search of an external anchor," Working Paper Series 958, European Central Bank.
    17. Brzoza-Brzezina, Michał & Makarski, Krzysztof & Wesołowski, Grzegorz, 2014. "Would it have paid to be in the eurozone?," Economic Modelling, Elsevier, pages 66-79.
    18. Philip Liu, 2010. "The Effects of International Shocks on Australia's Business Cycle," The Economic Record, The Economic Society of Australia, vol. 86(275), pages 486-503, December.
    19. Mardi Dungey & Denise Osborn & Mala Raghavan, 2014. "International Transmissions to Australia: The Roles of the USA and Euro Area," The Economic Record, The Economic Society of Australia, vol. 90(291), pages 421-446, December.
    20. Kulish, Mariano & Rees, Daniel, 2011. "The yield curve in a small open economy," Journal of International Economics, Elsevier, pages 268-279.
    21. 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.
    22. Yan M Sun, 2011. "From West to East; Estimating External Spillovers to Australia and New Zealand," IMF Working Papers 11/120, International Monetary Fund.
    23. 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.

    More about this item

    Keywords

    small open economy; Australia; Bayesian methods;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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