Tony Makin

Comparing Capital - and Trade - Weighted Measures of Australia's Effective Exchange Rate

Effective exchange-rate overvaluation is considered a leading indicator of currency crises. Yet, existing measures of nominal and real effective exchange rates focus on international trade in goods and neglect the importance of international trade in assets. This article develops a range of alternative effective exchange-rate indices for the Australian dollar, based mostly on international investment stocks and flows. Capital-weighted exchange-rate measures of the Australian dollar, in nominal and real terms, reveal a stronger exchange rate over recent decades than suggested by the standard measure. Similar measures for other currencies could improve understanding of exchange-rate behaviour.

Inflation distortion of the external accounts: the Australian example

Examines the effect of domestic inflation on recorded measures of the current account of the balance of payments. When domestic inflation is relatively high, it distorts conventionally measured current account deficits. This is because part of the recorded servicing payments on external liabilities are actually capital repayments and hence should be shown on the capital account. Presents estimates of Australias inflation-adjusted current account deficit as an example of the methodology outlined. These estimates suggest that, in practice, Australias inflation – adjusted account deficit throughout the 1980s, expressed as a proportion of GDP, was under half the value of the nominal measure. When nominal measures of external deficits differ sub-stantially from inflation-adjusted outcomes, they can give misleading signals to policymakers.

Inflation Expectations, Interest Rates and Arbitrary Income Transfers

Unexpected inflation, disinflation or deflation cause arbitrary income transfers between an economys borrowers and lenders. This redistribution results from distorted real interest rates that are too high when price level changes are over-predicted and too low when they are under-predicted. This article shows that in Australias case, inflation expectations were mostly biased upwards throughout the 1990s, according to the Melbourne Institute of Applied Economic and Social Research series and to a new derived series based on bond yields, implying that real interest rates were too high over this time. In turn, this caused substantial arbitrary income transfers from debtors to creditors, estimated to have averaged up to 3 per cent of gross domestic product over the period.

Open economy measures of wealth and Hicksian national income

This paper argues that a total approach to macroeconomic stock estimation is necessary when assessing the overall significance of a nations foreign debt level. In an increasingly integrated global economy, changes in national wealth—the difference between the value of internationally tradable assets and external liabilities—not only help gauge creditworthiness, but may be used to complement the traditional flow measures of gross national product and national income. Moreover, following Hicks (1946), changes in open economy measures of wealth yield a new measure of national income. Prototypical estimates of wealth and Hicksian income are presented for Australia by way of example.

The Public Accounts and Fiscal Policy

This article discusses the economy-wide effects of fiscal policy and major features of public outlays, receipts and debt trends in Australia.