Essays In Australian Macroeconomic Policy

Abstract

This thesis is a collection of three essays on macroeconomic policy for the Australian economy, which are contained in Chapters 2, 3 and 4. This thesis makes three main contributions. First, the thesis presents the estimation of fiscal expenditure and net revenue multipliers, taking into account the external sector and the government budget constraint. The incorporation of the government budget constraint allows a better estimation of the effect of fiscal policy on the components of GDP. Second, this thesis contributes to the understanding of the interaction of monetary policy, asset prices and credit and the implications on real activity. Finally, the thesis decomposes total hours worked into average hours worked and employment in order to estimate the responses of output, average hours worked and employment to shocks that have permanent (technology shocks) and transitory (average hours worked and employment shocks) effects on output. Chapter 2 analyses the effect of fiscal policy on real activity and debt dynamics using a SVAR model with short run restrictions. The estimates of government spending and net revenue multipliers are statistically significant. The model shows that the effect of fiscal policy on output is of short duration and takes place basically during the first quarter. When debt feedback is included in the model, the shock to government spending generates higher GDP on impact and over time as well as higher government revenue and exchange rate than the corresponding responses in the model without debt feedback. The GDP and net revenue responses in the model with debt feedback contribute to the gradual reduction of the debt-toGDP ratio. The composition of the change of GDP is also affected with more investment and less net exports over time. The results also support the Keynesian view that a positive shock to government spending increases private consumption. Chapter 3 assesses the relationship between monetary policy, credit and asset prices using a FAVAR model. The results indicate that a positive shock to the cash rate has a negative effect on asset prices. This chapter also presents estimates of the negative effects of this policy on GDP, GNE and employment, which should be taken into account in policy implementation. The effect of an increase in credit on asset prices is not statistically significant and is negative for share prices and positive for house prices. The response of the interest rate is almost zero for the whole projection period, which could be explained by an elastic supply of loans in Australia, as the international funds market is an important source of financing for bank loans. This study also finds a statistically significant positive response of credit to an increase in share and housing prices, providing evidence that supports the financial accelerator hypothesis. Chapter 4 analyses the responses of output and hours worked to shocks that have permanent and transitory effects on output. The permanent and transitory shocks are identified using an SVAR with long-run restrictions, assuming that only technological shocks can have a permanent effect on labour productivity and that hours worked per working-age population follows a stationary process. Hours worked is decomposed into average hours worked and employment. The results show a negative response of total hours to a positive, neutral technology shock and that total hours adjust mainly through employment. Additionally, when the model is extended to include the price of investment, a positive investment-specific technology shock produces a positive response of average hours worked and employment, with average hours having a more relevant role in the adjustment of total hours than in the case of the responses to a neutral technology shock. Labour productivity decreases temporarily after an average hours shock and increases after an employment shock.