26 Another variable frequently included in models surveyed is a measure of the

26 another variable frequently included in models

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contemporaneous effect of output on imports.
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26 Another variable frequently included in models surveyed is a measure of the exchange rate. I experimented with three alternatives: the trade-weighted index (TWI) produced by the Reserve Bank, the US dollar exchange and a measure of the real exchange rate. The results are reported in Table 15 of Appendix 3 and show that the earlier conclusions continue to hold. This outcome is unaffected by assuming that the exchange rate has a contemporaneous effect on the cash rate and by using the US dollar exchange rate in the place of the TWI. The Reserve Bank also publishes a series on the real exchange rate and I also experimented with adding this to the base model. The resulting decomposition of output is shown in Table 16 and clearly support the earlier conclusions regarding the relative effectiveness of fiscal and monetary policy during the GFC. A number of papers surveyed have included a measure of commodity prices as part of the model and it might be argued that this is especially important for a country like Australia which, it has been argued, was heavily dependent on commodity exports to see it through the GFC. A commodity price series is available from the RBA web-site although only for the period from 1982(3) so that for this experiment the sample period was truncated accordingly. The decomposition of output using the base model expanded to include commodity prices is reported in Table 17 of Appendix 3 and shows, as before, that the conclusions drawn earlier are not significantly affected – monetary policy continues to dominate fiscal policy during the GFC period. In the previous sub-section I included tax revenue as part of the fiscal policy measure by replacing government expenditure with a government deficit variable. In several papers, tax rates have been considered as a variable additional to government expenditure and this is briefly considered here. Three alternative tax rates were
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27 experimented with: two calculated as the ratio of income tax revenue received by the central government to household income and the other the labour-income tax rate from the Treasury’s NIF model data base. All produced vary similar results (only those for the NIF-based tax rate are reported in Table 18 of Appendix 3) : monetary policy had a greater effect earlier and fiscal policy had a later effect than the base case. Thus, this experiment does nothing to change the broad conclusions reached on the relative efficacy of monetary and fiscal policy to offset effects of the GFC on GDP in Australia which were reached on the basis of the base case. Finally I consider the inclusion of government debt in the model. Various papers have argued strongly for the importance of this variable in a model used to analyse the effects of fiscal policy; see, for example, Favero and Giavazzi (2007) and Chung and Leeper (2007). I experimented with both the level of debt and the debt/GDP ratio and with two alternative identification assumptions – the standard one
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