Peter M. Summers

Exchange Rate Instability: A Threshold Autoregressive Approach

We fit a two-regime threshold autoregressive model to a trade weighted index of the Australian real exchange rate. We find strong evidence of a threshold in the real exchange rate, with the data being classified into two regimes. The timing of the first regime is consistent with events that would be expected to have led to pressure on the Australian exchange rate. However, there is no evidence to suggest that the Asian economic crisis led to the real exchange rate entering this regime. Copyright 2001 by The Economic Society of Australia.

Forecasting Australia’s economic performance during the Asian crisis

Abstract During the Asian economic crisis of 1997–98, published forecasts from a Bayesian vector autoregressive (BVAR) model consistently indicated that the crisis would have little or no effect on Australia’s economic performance, despite the deterioration in the trade balance. The worsening trade deficit led many other forecasters to predict a sharp fall in Australia’s GDP growth rate, as the countries most severely affected by the crisis represent over 60 percent of Australia’s export markets. This paper argues that the more pessimistic forecasts attached too much weight to the links between Australia’s external accounts and GDP growth. In particular, I show that forecasts for the period September 1997 to December 1998, conditional on the actual path of the merchandise trade balance, predict higher inflation and interest rates than unconditional forecasts from a model without the trade balance. There does, however, appear to be useful information in the individual components of the trade deficit. Conditioning on the actual paths of both exports and imports generally produces more accurate forecasts than conditioning on net exports. In particular, conditioning on the trade balance results in the least accurate forecasts for inflation and interest rates of any of the models considered here. On the other hand, conditioning on the individual trade flows produces the most accurate forecasts for inflation, and the second-most accurate for interest rates. Taken together, the results presented here lend support to the argument that Australia’s trade flows represent the outcomes of optimizing decisions, rather than defining constraints on economic growth.

Structural Identification of Permanent Shocks in VEC Models: A Generalization

An econometric procedure to identify the permanent shocks in vector error correction models is proposed, which allows one to combine long-run and contemporaneous restrictions. This procedure is applied to the six-variable model of King, Plosser, Stock and Watson (1991) with a view to providing an alternative interpretation to their results based on a different identification scheme. We argue that a real spending shock in the place of the real interest rate shock appears to better accommodate their empirical findings.

The Volatility of Real Exchange Rates: The Australian Case

This paper presents an empirical investigation into factors underlying the real U.S.‐Australian dollar exchange rate. We find that the random walk model of the real exchange rate can be improved by various GARCH specifications. In particular, we find that the estimated risk premium from a GARCH‐M model is not robust to model specification. When the model is extended to include the

The impact of macroeconomic policies in an oligopolistic economy with entry

US/Yen real exchange rate and an index of commodity prices the GARCH‐in‐mean term is no longer significant. The additional variables seem to account for the increased volatility of the real exchange rate in the post‐1983 period. Somewhat surprisingly, we find that changes in the Australian term spread and US‐Australian interest rate differential have little or no explanatory power for the real exchange rate.

How well do Markov switching models describe actual business cycles? The case of synchronization

This paper examines the impact macroeconomic policies in a system where the product market is modelled as an oligopolistic supergame in which potential entrants incur sunk entry costs. It is shown that policies which affect the interest rate, influence both the degree of competition in the industry and the structure of the industry. Moreover, it is demonstrated that when sunk entry costs are introduced in to the model firms respond in an asymmetric manner to policy changes. These results suggest that the economy may exhibit hysteresis.