Applied Economics, Volume 45, Issue 27, 2013, pp. 3801-3809.
Now that a number of central banks are faced with short-term nominal interest rates close to or at the zero lower bound, there is a renewed interest in the long-running debate about whether or not changes in the stock of money have direct effects. In particular, do changes in money have additional effects on aggregate demand outside of those induced by changes in short-term nominal interest rates? This article revisits and reinterprets the empirical evidence based on single equation regressions which is quite mixed, with some results supporting and other results denying the existence of direct effects. We use a structural model with no direct effects of money to show that the finding of positive and statistically significant coefficients on real money growth can be misleading. The model generates data that, when used to estimate analogues of the empirical regressions, produce positive and statistically significant coefficients on real money growth, similar to those often found when using actual data. The problem is that single equation regressions leave out a set of variables, which in turn, give rise to an omitted variables bias in the estimated coefficients on real money growth. Hence, they are an unreliable guide to calibrate monetary policies, in general, including at the zero lower bound.
For further information, see: Direct effects of money: Another look at the evidence or Reserve Bank of Australia Research Discussion Paper 2010-05.
Which macroprudential policy instrument performs best at stemming risks from the housing market? We assess this in a model where banks control the size of both their assets and liabilities, rather than passively intermediating the funds of savers, allowing them to effectively create credit. This approach captures key features of the dynamics of mortgage credit, which is of importance when evaluating macroprudential policies. Instruments affecting credit supply, such as time-varying capital requirements, are found to not improve stability or welfare. Instruments affecting credit demand, such as loan-to-value ratio policies, reduce fluctuations in credit, house prices and defaults, and improve welfare.
For further information, see: Evaluating macroprudential policy instruments when banks create credit (draft) and the Appendix.
How can house price belief formation best be characterised? I examine this by testing the predictions of a wide range of expectations models on surveyed house price forecasts. I show that these forecasts are well characterised by a model in which house price growth is believed to follow an autoregressive-like process, similar to intuitive beliefs (described in Fuster, Laibson and Mendel 2010). Evidence is presented against the hypotheses that house price beliefs are formed according to a wide range of other beliefs models, including fully rational, boundedly rational, diagnostic, adaptive and a range of other non-rational models.
For further details, see: Characterising house price beliefs (draft)
House price swings, when fuelled by credit, are accompanied by particularly severe GDP recessions (Jordà, Schularick and Taylor 2015). Can a prominent macroeconomic model with housing capture these dynamics? I document a set of stylised facts regarding the joint behaviour of house prices, household debt and GDP, particularly around large house price swings. I show that the Iacoviello (2005) model captures these facts if agents hold intuitive house price beliefs -- which well characterises the behaviour of surveyed house price forecasts -- but not if they form house price beliefs rationally or according to other commonly-studied non-rational methods.
For further details, see: Intuitive house price beliefs, credit-fuelled house price swings and the macroeconomy (draft)
Reserve Bank of Australia Bulletin, December 2014, pp. 1-5.
Growth in private non-mining business investment has been quite subdued over the past few years relative to the cyclical upswings seen in the 1980s and 1990s. Part of this weakness can be explained by cyclical factors that affect investment – such as a more moderate pace of growth in the output of, and demand for, non-mining goods and services. Further, the increasing importance of sectors of the economy that require less physical capital is likely to have weighed on non-mining investment in recent years. Nonetheless, non-mining investment is expected to pick up over time, supported by a gradual increase in the growth of domestic demand and accommodative monetary conditions.
For further information, see: Cycles in non-mining business investment.
Reserve Bank of Australia Bulletin, December 2011, pp. 33-43.
The Indonesian economy has recorded strong growth over the past few decades, and in recent years the firm pace of economic expansion has been accompanied by reduced output volatility and relatively stable inflation. Indonesia’s economic performance has been shaped by government policy, the country’s endowment of natural resources and its young and growing labour force. Alongside the industrialisation of its economy, Indonesia’s trade openness has increased over the past half century. As a near neighbour, Australia has long had significant trade ties with Indonesia.
For further information, see: The growth and development of the Indonesian economy.
Reserve Bank of Australia Bulletin, June 2011, pp. 9-14.
Over recent decades, Australia's trade has become increasingly oriented toward east Asia (excluding Japan). Rapid growth in economies from this region is often attributed to their export-oriented policies, with the volume of east Asian exports having increased six-fold over the past 20 years. Using information on the destinations and uses of east Asian exports, this article examines the characteristics of both intra-regional trade and exports to economies outside the region.
For further information, see: Destinations and uses of east Asian merchandise exports.
UNSW Honours Thesis, November 2008.
This paper finds some evidence of a cointegrating relationship between real median house price to real income ratios, real interest rates, and the housing interest payments to disposable income ratio in the Australian data at the capital city level. Dynamic ordinary least squares estimates of the long run equilibrium relationship suggest that the housing interest payments to disposable income ratio plays an important role in the determination of house prices. In particular, rises in this variable account for the increase in real median house price to real income ratios in the early 2000’s. The estimates of the coefficient on the real interest rate are inconsistent with the underlying theory, suggesting that there may be an omitted variable problem with these regressions.
For further information, see: Modelling house prices in Australian capital cities.