The pair of papers by Dungey and Pagan 2000 and 2009 are closely related the

The pair of papers by dungey and pagan 2000 and 2009

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The pair of papers by Dungey and Pagan (2000 and 2009) are closely related, the second being an update and extension of the first. Both are VAR models of the Australian economy and neither is specifically designed for the analysis of policy. In fact, neither has an explicit fiscal policy variable although both analyse monetary policy using the cash rate as the instrument. Identification is achieved by short-run restrictions in the first paper while the second extends the model to include non- stationary variables and long-run restrictions. The paper by Dungey and Fry (2009) is also a VAR model and is specifically focussed on the identification of monetary and fiscal policy shocks. It uses a more complex set of identification restrictions including short-run, long-run and sign restrictions. The paper is not focussed on Australia’s experience during the GFC; indeed, it uses data for New Zealand for the period 1983(2) to 2006(4) and thus finishes before the beginning of the GFC. Finally, the paper by Dungey and Fry (2010) is also specifically focussed on fiscal and monetary policy and uses Australian data; the sample period is not clearly stated but appears to be the same as that for Dungey and Pagan (2009) and so ends before the GFC. In all papers the policy shocks are shown to have their expected effects. A rise in short-term interest rates has a negative effect on GDP in all models although the magnitude varies. In Dungey and Pagan (2000) monetary policy was shown to have contributed considerable counter-cyclical effects to the evolution of GDP over time.
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8 Monetary policy was not always so beneficial, however – in an early application of a VAR model to the analysis of monetary policy in Australia, Weber (1994) finds that the 1989 recession in Australia was significantly exacerbated by monetary policy. Moreover, the later (2009) Dungey and Pagan paper argued that the magnitude of the monetary-policy effect was overstated according to the more sophisticated model analysed there. In Dungey and Fry (2010) a government expenditure shock was shown to have a persistent and unambiguously positive effect on output while the effect on output of a rise in the short-term interest rate is initially positive (but small) and negative thereafter. Finally, there has been a number of papers which have analysed the GFC in Australia in a less formal manner. Makin (2010) uses an historical decomposition of the changes in output over the period of the GFC to argue that “it was the behaviour of exports and imports, and not increased fiscal activity, that was primarily responsible for offsetting the fall in private investment due to the Global Financial Crisis” (p.5). Similarly, Day (2011), using similar methods to those of Makin, attributes much of the above-average performance of the Australian economy during the GFC to the resilience of Chinese imports from Australia driven by the Chinese fiscal stimulus.
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