In conclusion while there may be objections to the use of the HP filter to deal

In conclusion while there may be objections to the

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In conclusion, while there may be objections to the use of the HP filter to deal with the obvious trends in the data, alternatives explored here based on recent literature, show that the overall conclusions regarding the dominance of monetary policy in helping Australia through the GFC continue to hold. (iii) Additional variables I argued in section III that, given the paucity of analysis of policy effects during the GFC in Australia, it is sensible to start with the simplest possible model – in the present case one in the four variables of interest: output and variables representing fiscal policy, monetary policy and foreign demand. While there are eminent precedents for such a simple approach (see, e.g., Blanchard and Perotti, 2002, who have three variables), the final subsection on sensitivity analysis addresses a 5 The results in Table 10 are based on a model with two lags; if one lag is used, there is extensive autocorrelation which is substantially removed with two lags. Results for a model with one lag show a reversal of the relative importance of fiscal and monetary policies. 6 In this case, too, two lags were needed to remove (most) autocorrelation; but results are not sensitive to whether one or two lags are chosen.
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25 common criticism of VAR models: missing variables. Most commentators will have one (or more) suggestions for additional variables and below I report on the effects of adding a number of popular variables to the base model, one-at-a-time. A brief survey of the literature cited in section II suggests the following candidates: prices (inflation), imports, the exchange rate, commodity prices, tax rates and government debt. Consider the effects of adding each one of these variables. In all variants of the model, only the four components computed previously will be reported since the question is whether the addition of a variable will affect earlier conclusions regarding the relative efficacy of fiscal and monetary policy. In each case identification assumptions need to be made for the expanded model and I start with the assumption that the additional variable affects only itself and is affected only by itself, contemporaneously. Alternative restrictions were experimented with in some cases and are reported as appropriate. I begin with prices/inflation. Results for a model with the inflation rate calculated from the GDP deflator are reported in Table 13. They support the earlier conclusion that, compared to fiscal policy, monetary policy has a beneficial effect several quarters earlier and, at least when it counts, has a stronger effect on output. Nothing much changes when the CPI is used instead of the GDP deflator. Next, an additional source of foreign influence was considered by adding real imports as a fifth variable to the base model. The results are in Table 14 in Appendix 3 and show that the conclusions are largely unaffected: fiscal policy is late and small while monetary policy is timely and generally has a stronger effect. This outcome is not changed when the identification assumption is expanded to allow for a contemporaneous effect of output on imports.
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  • Fall '13
  • Updike-Tarrozi

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