Instead we make some ad hoc adjustments This appendix describes the more

Instead we make some ad hoc adjustments this appendix

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Instead, we make some ad hoc adjustments. This appendix describes the more important of these. C.1 The Decline in Mining Capital Productivity One large adjustment, which we also apply to the MMRF simulations discussed in Appendix B, is to underlying capital productivity in the mining sector. Whereas this is usually modelled as an exogenous stochastic trend, we assume that its recent decline is attributable to the mining boom. Accordingly, we remove this decline from the counterfactual. Capital productivity in the mining sector is measured as chain linked value added divided by the net capital stock at replacement cost. This has two important components, shown in Figure C1. First, longer-term changes in technology are modelled by a stochastic trend and shown as the pink lines. In the projections the trend declines, so as to reconcile the model’s mining output and export forecasts with those from the Bureau of Resources and Energy Economics. Actual capital productivity, shown by the blue lines, fluctuates around this trend reflecting endogenous substitution effects and lags between investment and production. For this particular shock, modelling underlying capital productivity as a stochastic trend seems to be an over-simplification. The decline is arguably not random, but reflects essential features of the mining boom. In particular, the average quality of resources being exploited has declined as prices rise; and the sector has become more capital intensive due to compositional changes, specifically the rise of LNG and iron ore production. Arguably, this should be a permanent feature of the model. Pending such a re-specification, we assume underlying capital productivity in the counterfactual remains flat, as the surge in iron ore and LNG investment
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39 does not occur. Measured capital productivity still declines because of endogenous responses to relative prices and activity. Figure C1: Capital Productivity in Mining Notes: Capital productivity is measured as constant price value added (GMIN) over the net capital stock (KMIN) lagged eight quarters. Underlying capital productivity is a stochastic trend derived in the joint estimation of the employment and investment equations, with the joint estimation involving common parameters derived from the production function in the long-run component of each equation; the variable controls for substitution effects and lags between investment and production. Sources: ABS; Authors’ calculations and AUS-M model database and simulations C.2 Adjustment to Capital Goods Imports The mining boom has led to a surge in imports of equipment. However, the model’s equation for equipment imports only explains part of this surge, with large positive residuals. A large part of this unusual increase seems attributable to compositional and technological changes. In particular, company-level information examined by Connolly and Orsmond (2011, p 40) indicates that an unusually high proportion of the construction investment in mining is imported, including floating platforms and LNG modules, and materials used in construction. Sheehan and
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