Solving Linear Rational Expectations Models with Predictable Structural Changes

Standard solution methods for linear stochastic models with rational expectations presuppose a time-invariant structure as well as an environment in which shocks are unanticipated. Consequently, credible announcements that entail future changes of the structure cannot be handled by standard solution methods. This paper develops the solution for linear stochastic rational expectations models in the face of a finite sequence of anticipated structural changes. These events encompass anticipated changes to the structural parameters and anticipated additive shocks. We apply the solution technique to some examples of practical relevance to monetary policy.structural change; anticipated shocks; rational expectations

Economic Change in India

India has become an increasingly important part of the global economic landscape over the past decade. Its economy has become more open to international trade, its workforce is growing strongly and the rate of investment has picked up following economic reforms. The strong growth of the Indian economy has also seen a significant deepening of the trade relationship between Australia and India, with India now the third largest destination for Australia’s exports.India; economic reform; investment; trade

The Effect of Uncertainty on Monetary Policy: How Good are the Brakes?

In practice, monetary policy changes tend to produce a smooth path for interest rates while the path of policy interest rates generated by models is often considerably more variable. This paper investigates whether the inclusion of uncertainty can help reconcile the theory to the practice. It shows that parameter uncertainty does not induce much smoothness when its effects are directly incorporated into a model. Uncertainty about the interest sensitivity of output can increase the smoothness of optimal policy in a model, but the path of policy interest rates generated is still considerably more variable than that observed in practice.interest rate smoothing; monetary policy; parameter uncertainty

Global Relative Price Shocks: The Role of Macroeconomic Policies

We use the multi-sector and multi-country G-Cubed model to explore the potential role of three major shocks – to productivity, risk premia and US monetary policy – to explain the large movements in relative prices between 2002 and 2008. We find that productivity shocks were major drivers of relative price movements, while shocks to risk premia and US monetary policy contributed temporarily to some of the relative price dispersions we observe in the data. The effect of US monetary policy shocks on relative prices was most pronounced in countries that fix their currency to the US dollar. Those countries that float were largely shielded from these effects. We conclude that the shocks we consider cannot fully capture the magnitude of the relative price movements over this period, suggesting that other driving forces could also be responsible, including those outside of the model.productivity; relative prices; G-Cubed; risk premia; economic policy

Monetary Policy-making in the Presence of Knightian Uncertainty

This paper explores the extent to which Knightian uncertainty can explain features of interest rate paths observed in practice that are not generally replicated by models of optimal monetary policy. Interest rates tend to move in a sequence of steps in a given direction, or remain constant for some time, rather than experiencing the frequent reversals that commonly arise from optimal policy simulations. We categorise the types of uncertainty that have been explored to date in terms of the decision-making behaviour they imply. From this, we suggest a more intuitively appealing formulation of Knightian uncertainty than the one that has previously been used in the analysis of monetary policy. Within a very simple optimal control problem, we show that our preferred formalisation is consistent with interest rate paths with periods of no change. This suggests that the presence of Knightian uncertainty may explain some features of monetary policy-makers’ behaviour.Knightian uncertainty; monetary policy

Reconciling Microeconomic and Macroeconomic Estimates of Price Stickiness

This paper attempts to reconcile the high estimates of price stickiness from macroeconomic estimates of a New-Keynesian Phillips Curve (NKPC) with the lower values obtained from surveys of firms’ pricing behaviour. This microeconomic evidence also suggests that the frequency with which firms adjust their prices varies across sectors. The paper shows that in the presence of this heterogeneity, estimates of aggregate price stickiness from microeconomic and macroeconomic data should differ. Heterogeneity in firms’ pricing decisions, as well as a more realistic production structure, is introduced into an otherwise standard New-Keynesian model. Using a model calibrated with microeconomic pricing survey data for Australia, the paper shows that estimates of the NKPC considerably overstate the true degree of price stickiness and may falsely suggest that some prices are indexed to past inflation. These problems arise because of a type of misspecification and a lack of suitable instruments.separate by New-Keynesian Phillips Curve; inflation

A Small Model of the Australian Macroeconomy

This paper presents a small model of the Australian macroeconomy. The model is empirically based, aggregate in nature and consists of five estimated equations – for non-farm output, the real exchange rate, import prices, unit labour costs and consumer prices. The stylised facts underlying each equation are discussed and estimation results are presented. The model’s primary use is to examine macroeconomic developments over the short to medium term, although it also has a well-defined steady state in the longer run with appropriate theoretical properties. Dynamic responses of the model to monetary policy changes and selected shocks are illustrated in the paper.Australian economy; macroeconomic model; monetary policy

HORYZONS trial: protocol for a randomised controlled trial of a moderated online social therapy to maintain treatment effects from first-episode psychosis services.

INTRODUCTION: Specialised early intervention services have demonstrated improved outcomes in first-episode psychosis (FEP); however, clinical gains may not be sustained after patients are transferred to regular care. Moreover, many patients with FEP remain socially isolated with poor functional outcomes. To address this, our multidisciplinary team has developed a moderated online social media therapy (HORYZONS) designed to enhance social functioning and maintain clinical gains from specialist FEP services. HORYZONS merges: (1) peer-to-peer social networking; (2) tailored therapeutic interventions; (3) expert and peer-moderation; and (4) new models of psychological therapy (strengths and mindfulness-based interventions) targeting social functioning. The aim of this trial is to determine whether following 2 years of specialised support and 18-month online social media-based intervention (HORYZONS) is superior to 18 months of regular care. METHODS AND ANALYSIS: This study is a single-blind randomised controlled trial. The treatment conditions include HORYZONS plus treatment as usual (TAU) or TAU alone. We recruited 170 young people with FEP, aged 16-27 years, in clinical remission and nearing discharge from Early Psychosis Prevention and Intervention Centre, Melbourne. The study includes four assessment time points, namely, baseline, 6-month, 12-month and 18-month follow-up. The study is due for completion in July 2018 and included a 40-month recruitment period and an 18-month treatment phase. The primary outcome is social functioning at 18 months. Secondary outcome measures include rate of hospital admissions, cost-effectiveness, vocational status, depression, social support, loneliness, self-esteem, self-efficacy, anxiety, psychological well-being, satisfaction with life, quality of life, positive and negative psychotic symptoms and substance use. Social functioning will be also assessed in real time through our Smartphone Ecological Momentary Assessment tool. ETHICS AND DISSEMINATION: Melbourne Health Human Research Ethics Committee (2013.146) provided ethics approval for this study. Findings will be made available through scientific journals and forums and to the public via social media and the Orygen website. TRIAL REGISTRATION NUMBER: ACTRN12614000009617; Pre-results