Changes in the Determinants of Inflation in Australia

In the past decade, inflation in Australia and most other industrialised countries has been extremely well behaved. An important question is whether this reflects a series of favourable shocks to prices or a more fundamental change in the inflation process. In this paper, we explore developments in each of the key explanators of inflation. We find that some of the determinants of inflation in Australia have exhibited unusual or structural change in recent years. Using a mark-up model of inflation, we attempt to identify whether there has been a change in the relationship between inflation and its determinants. We find some tentative evidence of change. Although this change is not statistically significant, it may be economically significant. It leaves open the possibility that some forces may be emerging that could help reduce the variability of inflation in response to shocks.determinants of inflation, import prices, productivity, wages

A Re-examination of the Determinants of Australia’s Imports

The trend rise in import penetration in Australia has renewed interest in the determinants of import volumes. In this paper, an attempt is made to explain the growth in Australia’s imports in terms of the increased openness of the economy. Openness is proxied by the effective rate of protection. It is found that whilst reductions in protection do not help explain the growth in aggregate imports, they do explain a substantial share of the growth in imports of consumption and intermediate goods. This is said to reflect the impact of reductions in protection on both the demand for imports and the domestic supply of import substitutes.

Nominal Wage Rigidity in Australia

The existence of downward nominal price and wage rigidity has been used to argue against the adoption of zero inflation targets. A good deal is known about the nature and extent of price flexibility in Australia. However, little is known about nominal wage flexibility since investigations have been hindered by a lack of suitable data. Using a unique and unpublished microdata set, we find strong evidence of downward nominal wage rigidity. The idea that firms are able to circumvent wage rigidity by varying broader forms of remuneration is not supported by our study. We find that these broad measures are still skewed away from pay cuts, though to a lesser extent than wages. Not all of the observed rigidity is binding, though, since skewness away from wage cuts appears to occur for reasons other than downward wage rigidity. However, the extent of rigidity we do observe lends support to the pursuit of small positive rates of inflation as an objective of monetary policy.nominal wage rigidity; skewness away from wage cuts

Explaining Import Price Inflation: A Recent History of Second Stage Pass-through

This paper examines the pass-through of exchange rate changes to the domestic prices of imported consumer goods. Two distinct stages can be identified in the adjustment process. First, changes in the exchange rate are passed on to changes in the prices of imports over the docks. Second, these prices are, in turn, passed on to final retail import prices. It is found that pass-through in the first stage is rapid and complete. In the second stage, pass-through is also complete. It is, however, rather slow as importers appear able to vary their mark-ups substantially and for considerable periods of time. Moreover, the sizeable domestic costs involved in the distribution and sale of imports imply that a proportional change in the price of imports over the docks does not lead to the same proportional change in the retail import price, but rather one that is equal to the share of the imported item in the total bundle of costs faced by importers.

Are Terms of Trade Rises Inflationary?

This paper explores the relationship between the terms of trade and inflation. It shows, both analytically and empirically, that the exchange rate response to a change in the terms of trade is crucial to the inflation outcome. It suggests the existence of a ‘threshold’ exchange rate response. Our best estimate is that (other things being equal) a rise in the terms of trade is inflationary if the associated rise in the real exchange rate is less than about 1/3-1/2 of the rise in the terms of trade. However, if appreciation of the real exchange rate is larger than this, the consequent fall in the domestic price of importables is large enough that the terms of trade rise reduces inflation, at least in the short run.

Resource Flows to the Traded Goods Sector

This paper examines the allocation of private investment and employment between the traded and non-traded goods sectors in Australia. Industries are defined as export oriented, import competing or non-traded according to a classification system not used in previous studies of tradeable capacity. Applying this new system to disaggregated investment and employment data we find that there has been an increase in the share of total investment allocated to export oriented industries, but that their share of total employment has not changed. The share of both investment and employment in import competing industries has, on the other hand, fallen. These changes in the sectoral allocation of resources are consistent with the specialisation in production that accompanies international integration.

Labour Market Adjustment in Regional Australia

Over the past two decades, there has been a marked divergence in regional labour market outcomes within Australia. In this paper, we examine two aspects of this divergence. First, we analyse the wide variation in employment growth rates, finding that stronger rates of employment growth were associated with industry structure, proximity to factor and product markets, and the level of regional amenity. Second, we investigate how regional labour markets adjusted to different employment conditions. While regional migration is found to be the dominant adjustment channel, the relative strength of the migration adjustment differs across regions. Out-migration, accompanying employment declines, was stronger amongst regions with initially high unemployment rates and low regional amenity. Similarly, regions with initially low rates of unemployment and high regional amenity experienced stronger rates of in-migration in response to rising employment.migration; regional labour markets

Alternative Concepts of the Real Exchange Rate: A Reconciliation

Widespread reference to the real exchange rate stems from the belief that it is a useful summary indicator of key economic information. There exist, however, two forms of the real exchange rate: one form is based on deviations from purchasing power parity, while the other is based on the ratio of domestic prices of non-tradeables to tradeables. In this paper, an attempt is made to reconcile the two forms of the real exchange rate, both in theory and in practice. It is shown analytically that under certain restrictive conditions they will be equivalent. These conditions are, however, not always met so that in practice the two forms of the real exchange rate diverge. Changes in the productivity of the traded goods sector and the terms of trade are shown to be the principal sources of divergence. Identification of such economic fundamentals is central to the proper interpretation of movements in real exchange rates and, therefore, the efficacy of any attempt by policy makers to effect changes in them.

Les playoust au bout du monde: a case study of two French-Australian families

The thesis begins by referring to the French traders who came to Australia in the late 19th century. Their goal was to acquire wool of fine quality in order to meet the needs of the thriving woollen textile mills in Northern France, but in bypassing the London market, they also encouraged the colony's independence from the mother country. I present two of these traders, Georges and Joseph Playoust who arrived in Australia with their families, in 1889 and 1892 respectively, and discuss their early experiences in their new land. The second part of chapter 1 describes the education that these two brothers had received in France and compares it with the education they gave to their children in Australia. I outline the public education system that applied in France and Australia respectively at the time. I consider the values with which the Playoust brothers had been imbued in France of the Third Republic in the wake of the Franco-Prussian War. I note that despite their Republicanism, both Playoust brothers sent their children in Australia to private religious schools administered by religious orders that were banned in France. The second chapter describes the families' move to Sydney where the markets were larger. I touch on current concepts on transnationalism and apply them retrospectively to the family. I describe the leading role played by Georges Playoust in Sydney as founding president of the French Chamber of Commerce, and more generally his contribution to Australian society in which he became a public figure. I analyse in detail the speeches he made on the French National Day, both in French and in English. The third chapter is devoted to the contribution of women to the Alliance Francaise, then, when war broke out, to the French-Australian League of Help, an important patriotic fund in 1914-18 where both Playoust families were heavily involved as founders and administrators, together with Australians from the Red Cross and the Benevolent Society. The last chapter is based on the letters of the seven young Playoust men, who were mobilised by the French army to serve on the Western Front, and Jacques Playoust's diary from the savage campaign in Verdun. All these men had been educated in Australia, and wrote in English to each other, but in French to a young Parisian cousin. I analyse the complex web of ideas and sentiments expressed in these writings of French-Australian men in an extreme situation, fighting for their homeland far from 'home'. The conclusion returns to the themes of patriotism, transnationalism and French-Australian relations. Original letters and speeches and my translations of them are included in the Appendices