R monthly cash rate for the period July 1998 to March 2011 and the 11 am call

R monthly cash rate for the period july 1998 to march

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R : monthly cash rate for the period July 1998 to March 2011 and the 11 am call rate for the period March 1959 to June 1998. The monthly data were averaged to obtain quarterly data. They were found not to have any detectable seasonal components and are therefore not seasonally adjusted. X : exports of goods and services, real, seasonally adjusted. All data are in logs ( R as the log(1+cash rate)) and had a trend removed using the Hodrick-Prescott (HP) filter using a standard value of 1,600 for the lambda parameter. The data were de-trended since the focus is on the short-term fluctuations of output about trend. De-trending is also likely to avoid the issue of non-stationarity and (possible) cointegration. The HP trend rather than, say, a linear trend was removed because of the obvious non-linearity of the trend component in (at least) exports and the cash rate. These properties of the data can be seen from the graphs of the data and HP trends which are reported in Appendix 1 which also contains details of the sources of the data. Alternatives to the HP method of de-trending are explored in section VI. The de-trended data were tested for stationarity using the standard ADF test and the results are reported in Table 1 below. Clearly, all variables are stationary at the 1% level; this is independent of deterministic specification of the testing equation and is also independent of the number of lags. The variables were therefore modelled using a stationary SVAR.
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13 Table 1: Augmented Dickey-Fuller Tests Deterministic Component Variable Intercept Intercept and trend X -6.9836** -6.9647** G -4.9260** -4.9037** R -8.8637** -8.6110** Y -5.7859** -5.7893** Notes: ** indicates significance at 1%; critical values are -3.4638 and -4.0061 for intercept and intercept and trend respectively; all tests were run with 4 lags. V Results: The Base Case Data are available for all four variables in the model for the period from 1959(3) onwards. On the basis that more is better than less as far as data are concerned, estimates were originally based on the longest possible sample period: 1959(3) to 2011(4). However, there have been significant changes in the structure of the financial system in general from the beginning of the 1980s and in the operation of monetary policy in particular over this period which might result in instability in the model parameters. I therefore experimented with three different sample periods: the full sample from 1959(3) to 2011(4), a sample starting in 1980(1) to coincide with the beginning of financial deregulation in Australia and a sample starting in 1993(1) to coincide with the beginning of the current monetary policy regime which focusses on manipulating the cash rate with inflation the primary target. It turned out that the overall conclusions about the relative efficacy of fiscal policy and monetary policy were not sensitive to the choice of sample and the sample period 1980(1) to 2011(4) was chosen for the base case as a compromise between maximising the number of observations and restricting the period to one in which model instability is likely to be minimised.
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