Essays on the Australian Economy

Abstract

The theme of this thesis is about Australian macroeconomic issues. It features three self-contained chapters, each dealing with a different aspect of the Australian economy.

Chapter 1 examines the effects of a compulsory superannuation scheme on the Australian economy. I set up a general equilibrium, overlapping generations life-cycle model to study the effects of superannuation on housing purchases, general wealth accumulation, government age pension liabilities, and the broad economy. The quantitative model suggests that superannuation generates a significantly higher level, and a more equal distribution, of wealth. Superannuation also delays housing purchases, though it increases the aggregate level of the housing stock. In addition, it reduces age pension payments and the tax rate. Furthermore, if the domestic capital supply can alter the interest rate, then superannuation increases productivity and housing wealth. However, the interest rate change diminishes non-housing wealth and raises age pension liabilities.

Chapter 2 is about the mining boom and Australia's “two-speed economy”, in which there is a divergence in output between mining-related industries and the rest of the economy. I estimate a sectoral Structural Vector Autoregression (SVAR) model for Australia to investigate the aggregate and industry-level effects of a boom in commodity prices and the contributions made by the macroeconomic stabilisation tools of monetary policy and a flexible exchange rate. Using counterfactual policy exercises, I find evidence of the macroeconomic stabilisation policies contributing to the formation of a two-speed economy. Furthermore, using a forecast error variance decomposition I show that commodity price shocks have significant long-run ramifications for the Australian economy.

Chapter 3 tests whether exchange rate movements can be explained by economic fundamentals associated with the Taylor rule, namely the price level, the output gap, and inflation. Using an Unobserved Components model based on the asset pricing approach of Engel and West (2005), the evidence suggests that these fundamentals only play a small role for the bilateral exchange rates (against the US dollar) of Australia, Canada, and the United Kingdom.