In this seminar Jamie Cross will provide an overview of his recent paper, ‘The evolution of the Australian monetary policy transmission mechanism’. This paper seeks to answer two fundamental questions of Australian central bankers. First, has the Australian monetary policy transmission mechanism changed over time? Specifically, are changes present in: (1) the propagation mechanism and (2) the magnitude and frequency of exogenous shocks to the economy. Second, can accounting for these structural changes enhance forecast performance?

To answer these questions Jamie utilises a time varying structural vector autoregressive model. Impulse response functions assess the responsiveness of inflation and unemployment to monetary policy shock across four periods of Australian economic significance: the great inflation of the 1970’s, the float of the exchange rate in 1983, the introduction of inflation targeting in mid-1993 and the Global Financial Crisis of 2007-2009. The main result found by the author is that the propagation mechanism has changed over the sample period. Since the great inflation of the 1970’s both inflation and unemployment rates have become more responsive to changes in monetary policy. In recent years however this responsiveness has reversed with both inflation and unemployment responses weakening. One notable exception is the Global Financial Crisis period through which the inflationary response to monetary policy temporarily strengthened, however unemployment responses did not. This provides an empirical suggests that the traditional Phillips Curve has also changed over time. The results also reveal that inflation is susceptible to large exogenous shocks whilst unemployment is not. Next, in line with the literature on the US and UK economies the forecast results indicate that incorporating time variation within the propagation mechanism and in the volatility of the exogenous shocks leads to enhanced forecast performance.

Jamie Cross is a PhD student from Research School of Economics. His research interests are applied macro and financial economics and his thesis is concerned with studying time variation within the Australian economy.

The CAMA Macroeconomics Brown Bag Seminars offer CAMA speakers, in particular PhD students, an opportunity to present their work in progress in front of their peers, and reputable visitors to showcase their work.