Centre for Applied Macroeconomic Analysis Working Papers (CAMA)
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Item Metadata only Real-time forecasting of the Australian macroeconomy using flexible Bayesian VARs(Crawford School of Public Policy, The Australian National University, 2020-04) Zhang, Bo; Nguyen, Bao H.This paper evaluates the real-time forecast performance of alternative Bayesian Vector Autoregressive (VAR) models for the Australian macroeconomy. To this end, we construct an updated vintage database and estimate a set of model specifications with different covariance structures. The results suggest that a large VAR model with 20 variables tends to outperform a small VAR model when forecasting GDP growth, CPI inflation and unemployment rate. We find consistent evidence that the models with more flexible error covariance structures forecast GDP growth and inflation better than the standard VAR, while the standard VAR does better than its counterparts for unemployment rate. The results are robust under alternative priors and when the data includes the early stage of the COVID-19 crisis.Item Metadata only News shocks under financial frictions(Crawford School of Public Policy, The Australian National University, 2020-04) Gertz, Christoph; Tsoukalas, John D.; Zanetti, FrancescoWe examine the dynamic effects and empirical role of TFP news shocks in the context of frictions in financial markets. We document two new facts using VAR methods. First, a (positive) shock to future TFP generates a significant decline in various credit spread indicators considered in the macro-finance literature. The decline in the credit spread indicators is associated with a robust improvement in credit supply indicators, along with a broad based expansion in economic activity. Second, VAR methods also establish a tight link between TFP news shocks and shocks that explain the majority of un-forecastable movements in credit spread indicators. These two facts provide robust evidence on the importance of movements in credit spreads for the propagation of news shocks. A DSGE model enriched with a financial sector generates very similar quantitative dynamics and shows that strong linkages between leveraged equity and excess premiums, which vary inversely with balance sheet conditions, are critical for the amplification of TFP news shocks. The consistent assessment from both methodologies provides support for the traditional 'news view' of aggregate fluctuations.Item Metadata only Bayesian state space models in macroeconometrics(Crawford School of Public Policy, The Australian National University, 2020-04) Chan, Joshua C. C.; Strachan, Rodney W.State space models play an important role in macroeconometric analysis and the Bayesian approach has been shown to have many advantages. This paper outlines recent developments in state space modelling applied to macroeconomics using Bayesian methods. We outline the directions of recent research, specifically the problems being addressed and the solutions proposed. After presenting a general form for the linear Gaussian model, we discuss the interpretations and virtues of alternative estimation routines and their outputs. This discussion includes the Kalman filter and smoother, and precision based algorithms. As the advantages of using large models have become better understood, a focus has developed on dimension reduction and computational advances to cope with high-dimensional parameter spaces. We give an overview of a number of recent advances in these directions. Many models suggested by economic theory are either non-linear or non-Gaussian, or both. We discuss work on the particle filtering approach to such models as well as other techniques that use various approximations - to either the time t state and measurement equations or to the full posterior for the states - to obtain draws.Item Metadata only Multi-product firms and product quality expansion(Crawford School of Public Policy, The Australian National University, 2020-04) Pham, Van; Woodland, AlanThis paper develops and analyzes a model of international trade comprising multiproduct firms that can produce a range of product varieties distinguished by quality. First, it analyses the within-firm distribution of product quality and argues that firms export decisions are sensitive to their sizes and their product quality level. Specifically, a firm successfully exports both its high-end products and low-end products. Also, the sales of its top-end products relative to sales of its lower-end products is sensitive to the extent to which effective labour costs rise with quality. Second, the paper explores the heterogeneous effects of trade liberalization on multi-product firm behaviour and quality range choices. Under trade liberalization, small domestic firms experience a shrinkage of their product quality range, while even the new small-sized exporters narrow their product quality range to focus on an export variety. In contrast, existing exporters (large firms) can compete on both price and quality under trade liberalization by expanding their export product range toward both the low-end and high-end varieties. There is a greater expansion toward the lower-end varieties relative to the higher-end varieties under trade liberalization, this relative expansion decreasing as the variable trade cost decreases.Item Metadata only A comparison of monthly global indicators for forecasting growth(Crawford School of Public Policy, The Australian National University, 2020-04) Baumeister, Christian E.; Guerin, PierreThis paper evaluates the predictive content of a set of alternative monthly indicators of global economic activity for nowcasting and forecasting quarterly world GDP using mixed-frequency models. We find that a recently proposed indicator that covers multiple dimensions of the global economy consistently produces substantial improvements in forecast accuracy, while other monthly measures have more mixed success. This global economic conditions indicator contains valuable information also for assessing the current and future state of the economy for a set of individual countries and groups of countries. We use this indicator to track the evolution of the nowcasts for the US, the OECD area, and the world economy during the coronavirus pandemic and quantify the main factors driving the nowcasts.Item Metadata only Bayesian estimation of DSGE models(Crawford School of Public Policy, The Australian National University, 2012-01) Guerrun-Quintana, Pablo A.; Nason, James M.We survey Bayesian methods for estimating dynamic stochastic general equilibrium (DSGE) models in this article. We focus on New Keynesian (NK)DSGE models because of the interest shown in this class of models by economists in academic and policy-making institutions. This interest stems from the ability of this class of DSGE model to transmit real, nominal, and ?scal and monetary policy shocks into endogenous ?uctuations at business cycle frequencies. Intuition about these propagation mechanisms is developed by reviewing the structure of a canonical NKDSGE model. Estimation and evaluation of the NKDSGE model rests on being able to detrend its optimality and equilibrium conditions, to construct a linear approximation of the model, to solve for its linear approximate decision rules, and to map from this solution into a state space model to generate Kalman ?lter projections. The likelihood of the linear approximate NKDSGE model is based on these projections. The projections and likelihood are useful inputs into the Metropolis-Hastings Markov chain Monte Carlo simulator that we employ to produce Bayesian estimates of the NKDSGE model. We discuss an algorithm that implements this simulator. This algorithm involves choosing priors of the NKDSGE model parameters and ?xing initial conditions to start the simulator. The output of the simulator is posterior estimates of two NKDSGE models, which are summarized and compared to results in the existing literature. Given the posterior distributions, the NKDSGE models are evaluated with tools that determine which is most favored by the data. We also give a short history of DSGE model estimation as well as pointing to issues that are at the frontier of this research.Item Metadata only Monetary policy with a state-dependent inflation target in a behavioral two-country monetary union model(Crawford School of Public Policy, The Australian National University, 2020-04) Proano, C. R.; Lojak, B.In this paper we study the implementation of a state-dependent inflation target in a two-country monetary union model characterized by boundedly rational agents. In particular, we use the spread between the actual policy rate (which is constrained by the zero-lower-bound) and the Taylor rate (which can become negative) as a measure for the degree of ineffectiveness of conventional monetary policy as a stabilizing mechanism. The perception of macroeconomic risk by the agents is assumed to vary according to this measure by means of the Brock-Hommes switching mechanism. Our numerical simulations indicate a) that a state-dependent inflation target may lead to a better macroeconomic and inflation stabilization, and b) the perceived risk-sharing among the monetary union members influences the financing conditions of the member economies of the monetary union.Item Metadata only Estimation in non-linear non-Gaussian state space models with precision-based methods(Crawford School of Public Policy, The Australian National University, 2012-01) Chan, Joshua C. C.; Strachan, Rodney W.In recent years state space models, particularly the linear Gaussian version, have become the standard framework for analyzing macroeconomic and financial data. However, many theoretically motivated models imply non-linear or non-Gaussian specifications ?or both. Existing methods for estimating such models are computationally intensive, and often cannot be applied to models with more than a few states. Building upon recent developments in precision-based algorithms, we propose a general approach to estimating high-dimensional non-linear non-Gaussian state space models. The baseline algorithm approximates the conditional distribution of the states by a multivariate Gaussian or t density, which is then used for posterior simulation. We further develop this baseline algorithm to construct more sophisticated samplers with attractive properties: one based on the accept-reject Metropolis-Hastings (ARMH) algorithm, and another adaptive collapsed sampler inspired by the cross-entropy method. To illustrate the proposed approach, we investigate the effect of the zero lower bound of interest rate on monetary transmission mechanism.Item Open Access Understanding the deviations of the Taylor Rule: A new methodology with an application to Australia(Crawford School of Public Policy, The Australian National University, 2014-04) Hudson, Kerry B.; Vespignani, Joaquin L.This investigation aims to explain and quantify the deviations of the Taylor Rule. A novel three-step econometric procedure designed to reflect the data-rich environment in which central banks operate is proposed using information for 229 macroeconomic series. This procedure can be applied to data for any economy with inflation targeting monetary rule. Our application with Australian data shows that approximately 65% of Australia's deviation from the Taylor Rule can be explained systematically, with international factors and a domestic factor accounting for 41.9% and 22.5% respectively of the total variation in deviation from the rule. Australian deviation from the Taylor Rule is also associated with the deviation of the US´s Taylor Rule, indicating that the Reserve Bank of Australia appears to be following an international monetary policy trend set forth by the world's largest economy.Item Open Access Surfing a wave of economic growth(Crawford School of Public Policy, The Australian National University, 2017-02) McGregor, T.; Wills, S.We investigate whether the geographic determinants of growth extend to natural amenities. We combine data on spatial and temporal variation in the quality of over 5000 surf breaks globally with data on local economic performance, proxied by night-time lights. We document a strong association between natural amenity quality and local economic development. Economic activity grows faster near good surf breaksItem Open Access Regulatory stress tests and bank responses(Crawford School of Public Policy, The Australian National University, 2020-03) Janda, Karel; Kravtsov, O.In this paper, we investigate how the regulatory stress test framework in the European Union affects banks' investment decisions and portfolio choices. Using the causal inference and event study methodology, we document a substantial impact of EU-wide stress tests in 2011, 2014 and 2016 on the banks' portfolio strategies. The banks subject to regulatory stress tests tend to structure their portfolios with lower risk assets that is reflected in a decline in risk-weighted assets as compared to the control group. At the same time, the dynamic of realized risk that is measured by the proportion of non-performing exposure in portfolios remains unaffected. The estimates based on two alternative subsamples indicate that the magnitude of such effect rise with the increase in the size of the bank´s assets.Publication Open Access The impact of gender equality policies on economic growth(Crawford School of Public Policy, The Australian National University, 2016-02) Kim, Jinyoung; Lee, Jong-Wha; Shin, KwanhoThis paper introduces a model of gender inequality and economic growth that focuses on the determination of women's time allocation among market production, home production, child rearing, and child education. The theoretical model is based on Agénor (2016), but differs in several important dimensions. The model is calibrated using microlevel data of Asian economies, and numerous policy experiments are conducted to investigate how various aspects of gender inequality are related to the growth performance of the economy. The analysis shows that improving gender equality can contribute significantly to economic growth by changing females' time allocation and promoting accumulation of human capital. We find that if gender inequality is completely removed, aggregate income will be about 6.6% and 14.5% higher than the benchmark economy after one and two generations respectively, while corresponding per capita income will be higher by 30.6% and 71.1% in the hypothetical gender-equality economy. This is because fertility and population decrease as women participate more in the labor market.Publication Metadata only Age-dependent risk aversion: Re-evaluating fiscal policy impacts of population ageing(Crawford School of Public Policy, The Australian National University, 2020-04) Poonpolkul, P.This study revisits optimal fiscal policies in response to population ageing by introducing an age-dependent increasing risk aversion assumption into an OLG model with risk-sensitive preferences. Under this specification, the policy evaluation factors in the welfare cost of policy-induced uncertainties and suggests that, based on future generations' welfare, financing population ageing by either reducing social security benefits or extending the retirement age may not be as strongly preferred over raising the payroll tax rate as prior studies have suggested. Varying risk aversion also emphasizes the role of precautionary savings that causes individuals to respond slightly differently to changes in demographic structures and price variables. This, in turn, influences the redistribution of life-cycle variables and transition dynamics of aggregate variables.Publication Metadata only US shocks and the uncovered interest rate parity(Crawford School of Public Policy, The Australian National University, 2020-04) Li, Mengheng; Fu, BowenThe literature on uncovered interest rate parity (UIP) shows two empirical puzzles. One is the failure of UIP, and the other is the unstable coefficients in the UIP regression. We propose a time-varying coefficients model with stochastic volatility and US structural shocks (TVC-SVX) to study how US structural shocks affect time-variation in the bilateral UIP relation for twelve countries. An unconditional test and a conditional test for UIP are developed. The former tests if UIP coefficients mean-revert to their theoretical values, whereas the latter tests coefficients at each point in time. Our findings suggest that the failure of UIP results from omitted US factors, in particular US monetary policy, productivity and preference shocks, which are also found to Granger cause local movements of UIP coefficients.Publication Metadata only The effect of fuel prices on traffic flows: Evidence from New South Wales(Crawford School of Public Policy, The Australian National University, 2020-04) Zhang, Tong; Burke, PaulUnderstanding how traffic flows respond to fuel price changes is useful for traffic management. This study uses a dataset of 11.9 million hourly observations from 118 traffic count stations over 2010-2017 to investigate the relationship between the gasoline price and traffic flows in the state of New South Wales, Australia. The findings suggest that higher gasoline prices reduce traffic flows, with an average effect size of -0.04 in the hourly estimates. The elasticity is particularly pronounced during off-peak periods, both on weekdays (-0.10) and weekends (-0.07). In contrast, a positive effect of gasoline prices on traffic flows is observed for peak periods on weekdays (0.06). Evidence is also obtained that afternoon peak-hour speeds are faster when gasoline prices are higher, consistent with a lowering of traffic density. The research also finds a negative price elasticity of gasoline demand and that people are more likely to use public transport when gasoline prices are higher. The findings suggest that fuel excise plays a role in both reducing overall road dependence and alleviating the severity of some peak-hour traffic jams.Publication Metadata only Shadow banks and macroeconomic instability(Crawford School of Public Policy, The Australian National University, 2013-04) Meeks, Roland; Nelson, Benjamin; Alessandri, PiergiorgioWe develop a macroeconomic model in which commercial banks can offload risky loans to a ?shadow' banking sector, and financial intermediaries trade in securitized assets. We analyze the responses of aggregate activity, credit supply and credit spreads to business cycle and financial shocks. We find that: interactions and spillover effects between financial institutions affect credit dynamics||high leverage in the shadow banking system makes the economy excessively vulnerable to aggregate disturbances||and following a financial shock, stabilization policy aimed solely at the securitization markets is relatively ineffective.Publication Metadata only Emotion in Euro Area Monetary Policy Communication and Bond Yields: The Draghi Era(Crawford School of Public Policy, The Australian National University, 2022-04) Kanelis, D.; Siklos, Pierre L.We combine modern methods from Speech Emotion Recognition and Natural Language Processing with high-frequency financial data to precisely analyze how the vocal emo-tions and language of ECB President Mario Draghi affect the yields and yield spreads of major euro area economies. This novel approach to central bank communication reveals that vocal and verbal emotions significantly impact the yield curve, with effects varying in magnitude and direction. Positive signals raise German and French yields, while negative signals increase Italian yields. Our analysis of bond spreads indicates that positive communication influences the risk-free yield component, whereas nega-tive communication affects the risk premium. Additionally, our study contributes by constructing a synchronized dataset for voice and language analysis.Publication Metadata only The Effect of Supply Base Diversification on the Propagation of Shocks(Crawford School of Public Policy, The Australian National University, 2022-03) Bahal, G.; Jenkins, C.; Lenzo, D.We study how supply base diversification affects the propagation shocks. We identify exoge-nous shocks with the occurrence of natural disasters in the US from 1978-2017. Affected suppliers reduce their customers' sales growth by 30% on average. Notably, firms with input purchases spanning many suppliers, geographies, or producers within industries attenuate the transmission of shocks by 60-70%. We then show, causally, that diverse firms mitigate shocks by temporarily substituting towards unaffected suppliers producing similar inputs. A general equilibrium production networks model reveals that aggregate volatility would have been 33%greater from 1978-2017 in a counterfactual without input substitution by diverse firms.Publication Metadata only Forecasting bank leverage(Crawford School of Public Policy, The Australian National University, 2012-04) Hambusch, Gerhard; Shaffer, SherrillStandard early warning models to predict bank failures cannot be estimated during periods of few or zero failures, precluding any updating of such models during times of good performance. Here we address this problem using an alternative approach, forecasting the simple leverage ratio (equity/assets) as a continuous variable that does not suffer from the small sample problem. Out-of-sample performance shows some promise as a supplement to the standard approach, despite measurable deterioration in prediction accuracy during the crisis years.Publication Metadata only Bridging the gap: Integrating price mechanisms into international climate negotiations(Crawford School of Public Policy, The Australian National University, 2012-04) McKibbin, Warwick J.; Morris, Adele C.; Wilcoxen, Peter J.The Parties to the United Nations Framework Convention on Climate Change (UNFCCC) continue their efforts to forge a new binding international agreement by 2015. The negotiations face daunting odds, but the 2009 Copenhagen Accord's shift towards heterogeneous national commitments was a positive step forward for climate policy. The prior presumption that binding commitments could only take the form of a percentage reduction relative to historical levels alienated rapidly industrializing countries and led to unproductive disputes over base years and other issues of target formulation. However, the disparate approaches now under discussion complicate comparing the likely emissions reductions and economic efforts required to achieve the commitments. This paper makes two points. First, we offer good reasons and ways to adapt international negotiations to allow for price-based commitments. The economic uncertainty surrounding target-only commitments is enormous. Combining a clear cumulative emissions target with limits on the cost associated with achieving the target would balance the environmental objective with the need to ensure that commitments remain feasible. This economic insurance could foster greater participation in the agreement and more ambitious commitments. Specifically, we suggest that in addition to their cumulative emissions targets for the 2013 to 2020 period, major economies could agree to a price collar on greenhouse gas emissions in their domestic economies. This would include starting floor and ceiling prices on a ton of CO2 and a schedule for real increases in those prices. All major parties would need to show at least a minimum level of effort regardless of whether they achieve their emissions target, and they would be allowed to exceed their target if they are unable to achieve it in spite of undertaking a high level of effort. The paper provides an example of how a price collar would work in the US context under a cap-and-trade system. Second, analyzing proposed climate commitments in terms of their implied economic stringency, as measured by the implied price on carbon necessary to achieve the targets, offers transparent and verifiable assurance of the comparability of effort across countries. It possible to calculate carbon price equivalents of climate commitments in a conceptually similar way to the tariff equivalents used in international trade negotiations. In sum, the lack of transparency in the level of effort involved in achieving particular emissions targets highlights the potential value of allowing for price-based commitments and argues for greater economic transparency in the international negotiation process.