Current Account Deficits: The Australian Debate

This paper documents the clear change of view, which has taken place in Australia over the past three decades or so, concerning the relevance of the current account deficit for policy. Historical experience under a fixed exchange rate regime suggested that large persistent deficits were unsustainable and could leave the economy vulnerable to sudden reversals in sentiment. These concerns persisted after the floating of the Australian dollar and financial deregulation, and it was thought that all arms of policy should help to rein in the then much larger current account deficits. However, these policies were shown to be ineffective and, by the early 1990s, the argument that current account deficits represent the optimal outcomes of decisions made by ‘consenting adults’ gained wide support. This paper presents some empirical evidence consistent with optimal smoothing in the face of temporary shocks; the persistence of the deficit is attributed to a modest degree of impatience relative to the rest of the world. Although it is now widely accepted that policy should not seek to influence the current account balance, the issue of external vulnerability remains of interest. Here, country-specific considerations are important, and it is argued that the factors that have made Australia relatively resilient to external shocks are also those that helped to attract foreign capital in the first place.

Current Account Deficits: The Australian Debate

This paper documents the clear change of view, which has taken place in Australia over the past three decades or so, concerning the relevance of the current account deficit for policy. Historical experience under a fixed exchange rate regime suggested that large persistent deficits were unsustainable and could leave the economy vulnerable to sudden reversals in sentiment. These concerns persisted after the floating of the Australian dollar and financial deregulation, and it was thought that all arms of policy should help to rein in the then much larger current account deficits. However, these policies were shown to be ineffective and, by the early 1990s, the argument that current account deficits represent the optimal outcomes of decisions made by ‘consenting adults’ gained wide support. This paper presents some empirical evidence consistent with optimal smoothing in the face of temporary shocks; the persistence of the deficit is attributed to a modest degree of impatience relative to the rest of the world. Although it is now widely accepted that policy should not seek to influence the current account balance, the issue of external vulnerability remains of interest. Here, country-specific considerations are important, and it is argued that the factors that have made Australia relatively resilient to external shocks are also those that helped to attract foreign capital in the first place.current account; external vulnerability; exchange rate regimes

Labour Force Participation and Household Debt

In the past decade or so there has been a substantial rise in the indebtedness and debt-servicing obligations of Australian households. This has been accompanied by a trend increase in labour force participation (LFP) for women and more recently for men. Microeconomic data show a clear positive correlation between indebtedness and LFP. This paper models the LFP decision of prime-age Australian women and men accounting for the influence of debt and assets along with a range of other variables found to be important in the literature. The potential two-way causation between debt and labour supply is also addressed. Data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey are used as it contains recent and detailed data on household wealth along with extensive labour market and demographic data. A cross-section model of LFP is estimated using the detailed measures of household debts and assets available in Wave 2 of the survey. In addition, a panel model, using only measures of owner-occupied housing debt and assets, is estimated using all five currently available waves. Evidence is presented to suggest that LFP is determined by several factors, including family structure, education, health and indebtedness. In general, most of the effect of indebtedness on an individual’s probability of participation in the labour force is captured through the household debt-servicing ratio, although the level of owner-occupied mortgage debt appears important for men. Also, the panel results suggest that accounting for unobserved heterogeneity across individuals is important when examining the influence of debt on labour supply.labour force participation; household debt; credit constraints; HILDA

Why worry about awareness in choice problems? Econometric analysis of screening for cervical cancer

Cervical cancer is one of the most preventable and curable forms of cancer. Since 1991 there has been a concerted effort in Australia to recommend and encourage women to have Pap smears every two years. Part of the success of this National Cervical Screening Program can be gauged by exploring the determinants of screening for cervical cancer among high-risk women and by addressing the specific question of whether screening is associated with socio-economic status. Accessibility to health services remains a core goal in health policy in Australia but evidence on whether the goal is being met is limited. Using unit record data from the 1995 National Health Survey, an econometric model is developed for whether women have ever screened or not. A proportion of women in the sample contend that they have never heard of a Pap test. The analysis characterizes this group of women and accounts for their presence in our modellingScreening choice; Awareness; Censored probit; Cervical cancer

The wealth distributions of migrant and Australian-born households

Wealth is an important measure of overall economic well-being, and influences migrants’ ability to integrate into their new country. Using data from the 2002 HILDA survey, Rochelle Belkar explores the disparity between the wealth distributions of Australian and foreign-born households. Her results reveal that immigrants accumulate less wealth than their Australian-born counterparts and that the gap grows throughout the distribution. Further analysis reveals that migrants are able to catch up to their native born counterparts not only through greater time in Australia, but also through human capital accumulation, part of which may be achieved in Australia

Labour force participation and household debt

In the past decade or so there has been a substantial rise in the indebtedness and debt-servicing obligations of Australian households. This has been accompanied by a trend increase in labour force participation (LFP) for women and more recently for men. Microeconomic data show a clear positive correlation between indebtedness and LFP. This paper models the LFP decision of prime-age Australian women and men accounting for the influence of debt and assets along with a range of other variables found to be important in the literature. The potential two-way causation between debt and labour supply is also addressed. Data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey are used as it contains recent and detailed data on household wealth along with extensive labour market and demographic data. A cross-section model of LFP is estimated using the detailed measures of household debts and assets available in Wave 2 of the survey. In addition, a panel model, using only measures of owner-occupied housing debt and assets, is estimated using all five currently available waves. Evidence is presented to suggest that LFP is determined by several factors, including family structure, education, health and indebtedness. In general, most of the effect of indebtedness on an individual’s probability of participation in the labour force is captured through the household debt-servicing ratio, although the level of owner-occupied mortgage debt appears important for men. Also, the panel results suggest that accounting for unobserved heterogeneity across individuals is important when examining the influence of debt on labour supply

Current account deficits: the Australian debate

This paper documents the clear change of view, which has taken place in Australia over the past three decades or so, concerning the relevance of the current account deficit for policy. Historical experience under a fixed exchange rate regime suggested that large persistent deficits were unsustainable and could leave the economy vulnerable to sudden reversals in sentiment. These concerns persisted after the floating of the Australian dollar and financial deregulation, and it was thought that all arms of policy should help to rein in the then much larger current account deficits. However, these policies were shown to be ineffective and, by the early 1990s, the argument that current account deficits represent the optimal outcomes of decisions made by ‘consenting adults’ gained wide support. This paper presents some empirical evidence consistent with optimal smoothing in the face of temporary shocks; the persistence of the deficit is attributed to a modest degree of impatience relative to the rest of the world. Although it is now widely accepted that policy should not seek to influence the current account balance, the issue of external vulnerability remains of interest. Here, country-specific considerations are important, and it is argued that the factors that have made Australia relatively resilient to external shocks are also those that helped to attract foreign capital in the first place