AN ELEMENTAL MACROE ECONOMIC MODEL FOR APPLIED ANALYSIS AT UNDERGRADUATE LEVEL

Transcription

1 ECONOMICS AN ELEMENTAL MACROECONOMIC MODEL FOR ALIED ANALSIS AT UNDERGRADUATE LEVEL by Rod Tyrs Busin ss School Th Univrsity of Wst rn Australia and ANU Rsarch School of Economics DISCUSSION AER 11.11

2 An Elmntal Macroconomic Modl for Applid Analysis at Undrgraduat Lvl* Rod Tyrs UWA Businss School and ANU Rsarch School of Economics May 2011 Working aprs in Economics UWA Businss School DISCUSSION AER * Thanks ar du to Bn Smith and Matthw Bng, formr collagus at th ANU, with whom th original rprsntation of th modl prsntd was originally workd out and trialld sinc th 1990s. Thanks ar also du to Jurg Wbr and William Colman for usful discussions about applications to th third yar and honours lvls.

3 Abstract: A graphical rprsntation is offrd basd on a fairly standard formulation of an undrlying comparativ static modl for applid undrgraduat analysis. Contrary to standard practic th approach taks Walrasian quilibrium as its starting point and considrs markt failurs that includ nominal rigiditis as spcial cass. It thrfor builds intuition that cntrs on pric rathr than quantity adjustmnt following shocks. Byond this, its advantags includ that it offrs comparativ as of rprsntation of xtrnal shocks, which ar particularly important in small opn conomis, it uss intuitiv dmand-supply markt diagrams throughout and it provids th ability to st as clar targts for montary policy th xchang rat, th CI and th GD pric. Finally, it allows for forward xpctations so that it offrs usful insights for studnts into th conomic consquncs of financial shocks.

4 1. Introduction: Macroconomics is a vry old sub-disciplin to which approachs hav bn many and varid. Th challng is to captur ky charactristics of th conomy as a whol, which prsss toward gnral quilibrium analysis and conomic dynamics in ways that ar too tchnically advancd for th avrag undrgraduat. To avoid disguising fundamntal idas about macroconomic bhavior bhind advancd tchniqu, th undrgraduat taching of macroconomics has tndd to mphasiz short run comparativ statics. Most commonly, th approach uss aggrgat dmand and aggrgat supply, combind with Hicks (1937, 1980) IS-LM rprsntation. 1 Fixd pric lvls ar commonly assumd in th Kynsian tradition and thr is most oftn a Kynsian cross diagram th subtrranan mssag from which is to mphasiz that, in dtrmining GD, failurs of labour, product and financial markts ar th dfault cas, with output bing drivn by unintndd invntory changs. 2 Awkwardly, this tratmnt is usually prsntd to undrgraduats immdiatly following a smstr of microconomics that is dominatd by conomic storis about optimizing agnts and claring markts. Th approach dscribd hr was concivd to offr an altrnativ, on that avoids th difficult intuition of th quilibrium loci usd in AD-AS and IS-LM and th dfault concption of th conomy crippld by nominal rigiditis. It was concivd jointly with Bn Smith (2000) originally as a taching tool to offr an altrnativ rprsntation to th standard usd in principls and intrmdiat conomics courss. 3 It is cntrd on a flxibl pric lvl Mundll (1963) - Flming (1962) framwork with imprfct financial 1 Rcntly, as growth and conomic dynamics hav bcom mor cntral to th advancd taching of macroconomics lmnts such as comparativ stady stats and two-priod analysis hav bcom mor frquntly usd, as in Williamson (2011). Whil th associatd Walrasian approach is dsirabl, ths dynamic prspctivs can com at th cost of much intuition and institutional dtail (concrning, for xampl, th balanc shts and rols of cntral banks) that is mor commonly taught along sid th comparativ static modls. 2 This is vn tru of Hall and Taylor (1991) and th vry rcnt othrwis xcllnt tratmnt by Fnstra and Taylor (2008: Chaptr 7), who us th Kynsian cross diagram to driv th IS curv. An altrnativ markt diagram approach to this drivation is offrd in Sction Th rprsntation usd also drivs in part from th graphical modl offrd intrmdiat radrs in Mankiw (2004). It is also informd by frqunt discussions with Gram Wlls, whos txt (Wlls 1995) offrs a comprhnsiv covrag of advancd undrgraduat approachs and supporting vidnc mphasizing th Australian cas. 1

5 capital mobility, in which an opn financial capital markt xprincs inflows and outflows dpnding on yild diffrntials and xchang rat xpctations but dos not achiv uncovrd intrst parity. Th ky advantags it offrs ar 1) th as of rprsntation of xtrnal shocks, which ar particularly important in small opn conomis, 2) th us of mor intuitiv dmandsupply markt diagrams throughout, 3) th ndognity of th pric lvl, 4) th Walrasian starting point (rfrnc cas) with wag stickinss offrd as a spcial cas, 5) th ability to st as clar targts for montary policy th xchang rat, th CI and th GD pric, an advantag ovr th AD-AS IS-LM rprsntation in which th mony supply must b xognous, and 6) it incorporats xpctational variabls that allow th analysis of optimism and pssimism shocks stmming from information failurs in financial markts. Th graphical approach has bn usd in support of widr macroconomic analysis by Tyrs (2001), Robrts and Tyrs (2003) and Rs and Tyrs (2004). Th modl gnralizs radily into on suitabl for applid analysis in mor advancd classs and a two priod, multi-product vrsion is availabl for computr simulation using th frwar Rungm, a componnt of th Australian Gmpack modling packag. 4 Th nxt sction summariss th ky assumptions, th labour markt is prsntd in Sction 3 and consumption and saving ar discussd in Sction 4. Th small opn conomy financial capital markt is prsntd in Sction 5, th Forign Exchang markt in Sction 6 and th markt for mony in Sction 7. Th complt modl is assmbld in Sction 8 and mony nutrality is dmonstratd in Sction 9. Shocks with nominal wag rigidity ar considrd in Sction 10 and, for illustration, an unxpctd bond-financd fiscal xpansion is analysd in Sction 11 and a financial crisis in Sction 12. Links with 4 This modl and softwar wr routinly usd by studnts at intrmdiat and advancd lvls at th ANU through 2009 and thy ar in us by a third yar macroconomics class at th UWA Businss School. It has also bn usd for svral yars in training courss at th Australian Trasury. Applications of th computational modl appar in Tyrs and Rs (2004). Dtails ar availabl from th author. 2

6 th mor standard AD-AS IS-LM rprsntation ar formalizd in Sction 13 and conclusions ar offrd in Sction Ky assumptions: Short run: Th rlvant lngth of run is within th gstation priod of nw invstmnt, so that invstmnt placs dmands on th capital goods sctor but dos not add significantly to th productiv capital stock in th currnt priod (though it dos in futur priods, if modlld) so K K. Expctations: Much dpnds on xpctations and ths ar xognous in th comparativ static graphical rprsntation. Agnts form xpctations ovr th GD pric lvl,, th xchang rat, E, th lvl of futur privat disposabl incom, F, and th ral rat of rturn on installd capital nt of dprciation, r C. Ths thn bcom shiftrs in th graphical rprsntation. If ths ar lft inactiv, th modl gnrats changs in pric lvls, xchang rats and intrst rats but thy ar not anticipatd. No stady stat: Th ral intrst rat in th capital markt, r, gnrally diffrs from th nt rat of rturn on installd capital, r C : M K (1) r rc Financial assts ar bonds and mony: risk considrations ar not modld xplicitly, so assts ar consolidatd into bonds of short maturity (montary instrumnts) and of long maturity (th bulk of th collctiv asst portfolio and th ky instrumnts in saving and invstmnt), th yilds on which ar sparatd via th sgmntation thory of th yild curv. K No uncovrd intrst parity: In gnral, financial capital is imprfctly mobil intrnationally on th grounds that hom long maturity bonds ar diffrntiatd from thir 3

7 forign countrparts by considrations of risk and transaction cost. t rsponss to shocks to yild diffrntials and xchang rat xpctations do mov toward uncovrd intrst parity. An initially claring labour markt: Th rfrnc cas is Walrasian, in which all rprsntd markts clar. Th pric lvl is flxibl (ndognous) and, at last initially, th nominal wag is assumd to adjust to clar th labour markt. Onc changs in th pric lvl ar dtrmind, th ffcts of wag stickinss can thn b rsolvd. So mploymnt is initially constant at L L. Initial output in volum units is thrfor: (2) A, L, K A, L, K whr A is th xognous total factor productivity cofficint. 4

8 2. Th labour markt: Labour supply is inlastic on th grounds that mpirical studis find its short run lasticity to b small, and bcaus it is intuitiv for studnts to driv th labour supply curv from th trad-off btwn consumption and lisur with Cobb-Douglas prfrncs. 5 In this cas, incom and substitution ffcts offst on anothr, laving th labour supply curv vrtical. Labour dmand is drivn by production tchnology with th standard condition quating th mony wag, W, in $/workr yar, to th valu of th marginal product of labour, or th ral wag, w, to th marginal physical product of labour: (3) W A, L, K w M L LL L LL This quilibrium is illustratd in th labour markt diagram of Figur Invstmnt dpnds on th nt rat of rturn on installd capital: Th ral gross rat of rturn on an alrady installd machin is just th valu of its marginal product, M K, which is th annual incras to rvnu gnratd by th machin, dividd by th markt pric of th machin, K. Th nt rat of rturn just subtracts th rat of dprciation,. This is what drivs invstmnt dcisions. (4),, A L K rc MK K K KK K KK 5 Th most rcnt rsarch on th long run lasticity of labour supply (its rat of rspons to th ral wag) is from Ashnfltr, O., K. Doran and B. Schallr (2010), A shrd of crdibl vidnc on th long run lasticity of labour supply, NBER Working apr 15746, Cambridg MA. Evidnc on mploymnt contracts shows supply lasticitis around zro, whil vidnc from taxi drivrs who njoy a far rat incras suggsts a vry small ngativ numbr th incom ffcts of th far incras tndd to b vry slightly largr than th substitution ffcts from lisur to consumption. 5

9 Figur 1 w L S A, L, K w 0 =W 0 / L D : w ML A, K ) L L In th short run th capital stock is givn, so firms do not ncssarily hav th optimal quantity. In th long run stady stat, howvr, invstmnt taks plac until th ral nt rat of rturn on capital falls to th lvl of th ral financing cost or th opportunity cost of invstd funds (th ral rat of rturn that can b arnd on financial instrumnts, or that must b paid if bonds ar issud to financ th invstmnt, or th markt ral intrst rat), r. Th ral rat is prfrrd hr to th nominal rat on th assumption that capital gains ar xpctd to accru whn th pric of capital goods inflats at th sam rat as hom goods-srvics. So in th stady stat, but not in gnral, r c r. So, in th lngth of run to b considrd, xpctd changs in r, r driv invstmnt: C C if if rc rc r r th rturn will xcd th ral financing cost, th invstmnt will not b mad. This xpctd futur valu of this rat of rturn which is thn xognous. 6

10 4. Consumption and saving: Hr a simpl incom tax rul is usd with a Kynsian consumption quation in prsnt and xpctd futur disposabl incom, masurd in ral volum quivalnts. All units ar product volums. Govrnmnt spnding, G, is a ral xognous policy variabl. (5) Elmntal tax rul: T t (6) Ral privat consumption C, rac bcrcc Tc F F TF (7) Ral privat saving:, S F, r T C, F, r (8) Total ral domstic saving:,,,,, S G r S r T G D F F To rflct consumption smoothing bhaviour, privat saving rsponds positivly to currnt disposabl incom and ngativly to xpctd futur disposabl incom. Th substitution ffcts ar assumd to dominat whn changs in bond yilds occur, so that privat saving also rsponds positivly to th ral yild on saving instrumnts (long maturity bonds), r. 5. Th small opn conomy financial capital markt: This is th markt that matchs saving to invstmnt. Units ar quivalnt volums of goods and srvics. (9) Ral invstmnt (brak-vn + nt): rc b N I I I K Hr th ratio of th xpctd nt rat of rturn on installd capital and th currnt ral long bond yild is closly rlatd to Tobin s Q, sinc th numrator dtrmins th currnt markt valu of capital assts and th dnominator dtrmins th ral cost of 7 r

11 financing thir rplacmnt. (10) Nt forign invstmnt dmand: NFI, G, r,,, c r I rc r SD F, G, r (11) Capital account nt inflows: *, R, NF *, R, KA r r S r r R Whr KA rprsnts th nt provision by forignrs of funds to financ a surplus of imports ovr xports (currnt account or CA dficit), S NF is nt forign saving, or th privat componnt of ths inflows, dpndnt on th forign bond yild, r*, th hom bond yild, r, and any (xognous) xpctation of a ral xchang rat chang, R. Th ral xchang rat hr has th financial dfinition, so it riss with apprciations. Th chang in th sock of official forign rsrvs, R, is an xognous montary policy variabl and, consistnt with th small opn conomy assumption, th forign bond yild, r*, is also xognous. This dpndnc implis somthing short of th ral vrsion of uncovrd intrst parity r r* /. Indd, S NF is influncd by dparturs from uncovrd intrst R R parity, th lattr applying only in a stady stat: R (12) SNF asf bsf r r*. R Th siz of th slop of this curv, b SF, thn dtrmins how quickly th solution approachs uncovrd intrst parity. Small valus suggst capital controls and larg valus suggst high lvls of financial capital mobility. Allowing dparturs from uncovrd intrst parity admits rality in a way that avoids th application inflxibility of approachs that impos it. 6 Th small opn conomy financial capital markt quilibrium is thn obtaind by finding th hom bond yild, r, that rndrs: 6 Th xcllnt gnral macroconomics txt by Blanchard and Shn (2004) is a cas in point. 8

12 (13), F,, c, c, D, F,, *, R, NF *, R, NFI G r r I r r S G r KA r r S r r R Onc th supply sid quilibrium has bn dtrmind, GD, or, is known. All th othr variabls in this quilibrium condition ar xognous, xcpt th hom long bond yild, r, which is radily solvd for. From this, thn, th ral valu of nt financial inflows on th capital account, KA, also mrgs. Critically, with claranc of th labour markt, th capital account balanc is sn to dpnd only on financial variabls, not on trad and th currnt account. Th quilibrium in this small opn conomy financial capital markt is illustratd as in Figur 2, with th curvs showing only thir shiftrs in parnthss. Figur 2 r KA(ΔR, R,r*) r 0 I-S D =, NFI F, G, r c KA- KA 0 0 KA+ 9

13 6. Th markt for forign xchang: First dfin th xchang rats. Th ral xchang rat is th numbr of rprsntativ forign product-srvic bundls that can b acquird in xchang for a singl hom product-srvic bundl. It is thrfor th common currncy ratio of th pric of hom goods to that of forign goods, bst rprsntd by th rspctiv GD prics, and But * is xprssd in forign currncy and so rquirs convrsion at th nominal xchang rat, E. Thus, if that is also dfind financially (apprciating whn it riss) w hav that: (14). R E * * / E Bcaus th capital account 7 must balanc th currnt account and th lattr is linkd to th valus of imports and xports in hom $, th balanc of paymnts in hom $ is: Bo KA CA 0 (15) KA S I CA N X M D whr N is nt factor incom from abroad. Imports, M, and xports, X, both dpnd on th ral xchang rat. *. Consistnt with th practic adoptd in rprsnting th financial capital markt, this should also b xprssd in quivalnt ral volums of hom product. Sinc N dpnds mainly on past invstmnts abroad, considr hraftr that N is an xognous constant, xprssd in ral trms and so in units of forign output. Rdfining th X and M in hom product quivalnts, th balanc bcoms: N (16) KA SD I CA X M Exports ar forign dmands for hom goods, which, lik any product dmand, dpnd positivly on forign incom and ngativly on th rlativ pric of hom goods or th ral xchang rat. Imports ar hom dmand for forign goods and so will dpnd R 7 This is hr dfind as th complmnt of th currnt account. It is thrfor th sum of what is commonly rfrrd to as th capital account, th financial account and th balanc on rsrvs. 10

14 positivly on hom incom, or GD, and ngativly on for rlativ pric of forign goods (th invrs of th ral xchang rat). For an intuitiv diagram, xprss ths in trms of th invrs of th ral xchang rat th rlativ pric of forign goods. So th currnt account dficit is: * 1 (17) CA N M, X, R R R Nt import dmand, or xcss dmand for goods, is thrfor unambiguously downward sloping in th rlativ pric of forign goods or positivly dpndnt on th ral xchang rat. Nt factor incom has th opposit dpndnc, howvr, though this is a pur valuation ffct, whras th trad flows combin valuation with volum adjustmnt ffcts. W will assum th trad account to dominat, so that th currnt account dficit can b writtn: * 1 (18) CA CA,, R Th currnt account masurs th nt inflow of paymnts associatd with currnt transactions, hr masurd as th quivalnt volum of hom goods. A dficit mans a nt outflow. This is th quivalnt of a nt outflow of forign xchang, matchd by a nt inflow of forign xchang arising out of financial flows in th financial capital markt. But w know from that markt that th nt inflow of forign xchang associatd with asst transactions is KA. And, so long as th labour markt clars, th quivalnt quantity of hom products is alrady boltd down. So th ral xchang rat adjusts to nsur that th balanc of paymnts dos actually balanc: Bo KA CA 0 (19) * 1 KA CA,, R 11

15 Th only ndognous variabls in this rlationship ar and R, but has alrady bn dtrmind in th labour markt. So this rlationship rvals th ral xchang rat, as shown graphically in Figur 3. Knowing and R, M and X can b obtaind by back solving if ndd. 7. Dmand sid, nominal part: Sinc th maturity of financial assts mattrs, a not on th yild curv is usful at th outst. Financial assts ar hr gnralisd as bonds. No risk considrations ar xplicit in th modl, xcpt to th xtnt to which thy diffrntiat hom from forign bonds and thrfor caus th failur of uncovrd intrst parity, lading to imprfct financial capital mobility vn whr no capital controls ar prsnt. But cntral banks dominat trad in mony markt instrumnts of maturity lss than a yar, whil th collctiv portfolio compriss mainly long trm instrumnts, which might b thought of hr as 10 yar bonds. Th yilds on short and long instrumnts do not mov togthr through tim, with short rats bing altrd by cntral banks in th managmnt of hom businss cycls whil long rats mov mor smoothly through tim and thir markts ar mor intgratd across countris, rflcting thir rol in quating th global supply of saving to global invstmnt dmand. 8 For ths rasons, th hom ral long bond yild is th quilibrating variabl in th financial capital markt. And, sinc long instrumnts dominat th collctiv portfolio th nominal long bond yild is th opportunity cost of holding mony. Th two ar rlatd as r i L, whr is th xpctd rat of inflation. A convntional cash in advanc constraint is assumd to undrli th dmand for ral mony balancs, which thn dpnds on GD, rprsnting transactions dmand, and th 8 Th rats ar kpt sparat by thr standard thoris of th yild curv, of which th most tlling is th sgmntation thory. Whn short rats ar low compard with long rats, th gap is sustaind by th transaction costs that would b incurrd wr a squnc of short contracts to rplac a singl long contract. 12

16 nominal long trm bond rat (20) md md, i m D, r Figur 3 S F (from financial capital markt) 1/ R 1/ R 0 R CA+ CA 0 0 CA- CA, * Whr is an xognous risk prmium that may b shiftd upward by pssimism about th prformanc of financial instrumnts othr than mony. Thus, whn financial instrumnts appar riskir, th opportunity cost of holding mony may not b as larg as th currnt long trm ral yild vn aftr adjustmnt for xpctd inflation. Th supply of mony bgins with th montary bas, M B, which cntral banks control by committing to trad in short trm instrumnts until xcss dmand at a dsignatd short yild is rducd to zro. Th rlationship btwn short rats and M B nd not b mad xplicit hr, howvr. Th mony multiplir thn links th montary bas to th 13

17 nominal mony supply and thnc to th supply of ral mony balancs. (21) M S 1 c MB c Whr c is th public s cash to dposit ratio and is th rsrv to dposit ratio of banks and othr financial institutions. So th supply of ral mony balancs can thn b quatd with its dmand in a claring mony markt. (22) D, M 1 M i M i S B S B S S c m r m c If th montary bas is considrd an xognous policy instrumnt, dtrmind by dclard lvls of i S in a sparat procss, th xpctd inflation rat is xognous, as ar th paramtrs c, and, th only ndognous unknown is th pric lvl,, or th xchang rat btwn hom mony and hom goods-srvics. Th diagram in Figur 4, unconvntionally, uss th ral intrst rat on th vrtical but, convntionally, ral mony balancs on th horizontal. GD, as a proxy for transactions dmand, xpctd inflation,, and th risk factor,, ar thn shiftrs of th mony dmand function, with th lattr two always xognous. As abov, th mony markt quilibrium is whr: M (23) m, D,, r S Th only variabl that rmains to b calculatd is th nominal xchang rat. If th forign pric lvl, *, is xognous, consistnt with th small country assumption, thn th nominal xchang rat, E, can b obtaind by transforming th standard xprssion 14

18 (14) for th now known ral xchang rat in trms of th known hom pric lvl: (24) * E R. Figur 4 r m S From financial capital mkt r 0 D + - +,, m m M S 8. Th complt modl: Th modl assmbls graphically on a squnc that follows from th dfault assumption of Walrasian quilibrium th simultanous claranc of all four intr-rlatd markts: th labour markt, th financial capital markt and th markts for hom and forign mony. Th graphical (and, if ndd, th numrical) solutions ar rcursiv, commncing with th labour markt and moving through th othr markts, all of which hav quantity axs that ar xprssd in quivalnt volums of hom products. 15

19 1. In th claring labour markt GD () is dtrmind. 2. Onc is known, privat and govrnmnt saving is known and so th opn conomy financial capital markt can b drawn. This dtrmins both th hom long bond yild and th nt inflows on th capital account, KA. 3. Th nt supply of forign xchang from th financial capital markt is KA and th xcss dmand for forign xchang in currnt intrnational transactions is th currnt account balanc, dfind as th dficit CA. For a balanc of paymnts, ths must b quatd in th forign xchang markt diagram. This yilds th ral xchang rat. 4. Th ral long bond rat from th financial capital markt, combind with th xognous xpctd inflation and risk factor, indicat th quantity of ral mony balancs dmandd. To bring supply into quality with this, for a givn short bond yild and hnc a givn montary bas and nominal mony supply, th pric lvl must adjust. This is th xchang rat btwn mony and hom goodssrvics in which th dmand for ral mony balancs is masurd. Th quilibrium pric lvl mrgs from th mony markt diagram. 5. Th nominal xchang rat thn follows from th ral xchang rat and th hom pric lvl. In th st of diagrams in Figur 5, th labour markt is omittd sinc Walrasian quilibrium implis claranc and a fixd lvl of GD,. Only th dmand sid is rprsntd. Arrows indicat th rcursiv solution in th Walrasian cas. 16

20 Figur 5 r r KA(ΔR,,r*) m S R r 0 r 0 I-S D = NFI, F, G, r c m, D, KA- KA 0 0 KA+ m M S S F 1/ R 1/ R 0 R E * CA, * CA+ CA 0 0 CA- 17

21 9. Mony nutrality: Th nutrality of mony whn thr ar no nominal rigiditis (all markts clar as in th Walrasian rfrnc cas) is an ssntial tst. It is radily sn from th rcursiv solution, abov and th masurmnt of all th horizontal axs in ral hom productsrvic volum quivalnts. Th ffct of a surpris (unxpctd) 10% hlicoptr xpansion in th nominal mony supply at ach stag is: 1. In th claring labour markt, labour supply dpnds on consumption-lisur prfrncs and labour dmand dpnds on th production tchnology, nithr of which bars any dirct rlationship with th supply of mony and so GD () is unaltrd. 2. In th financial capital markt, privat saving masurd as th ral volum of consumption dnid and this dpnds only on ral variabls, including th ral intrst rat or long bond yild. Th sam is tru for govrnmnt saving, hom invstmnt and for financial invstors xchanging assts intrnationally. Thr is thrfor no chang in th financial capital markt du to a ris in th supply of mony. 3. Th nt supply of forign xchang from th financial capital markt, KA, and th currnt account balanc, CA, ar both hr masurd in trms of quivalnt volums of hom products-srvics and nithr has any dirct dpndnc on th supply of hom mony. No chang thrfor occurs in this markt ithr. 4. In th sam way, th mony markt is charactrisd in trms of ral mony balancs with dpndnc on th ral hom long bond yild. Thr is thrfor no chang in th ral supply of mony. Thus: 18

22 M S (24) ms. So th xcss supply of mony rducs its valu rlativ to goods-srvics and so th GD pric riss by 10%. 5. With no chang to th ral xchang rat th nw rlativ abundanc of hom mony rducs its valu rlativ to forign mony and so th nominal xchang rat dprciats by 10%. (25) R E * 6. Finally, in th claring labour markt th markt-claring ral wag, w, is unchangd, which thn rquirs that th nominal wag riss by 10%. (26) W w Thus, an unxpctd hlicoptr mony xpansion has no ffct on variabls masurd in ral trms (as quivalnt volums of hom goods-srvics). Only nominal variabls (thos masurd in trms of $) ar altrd, and in ach cas thy chang by th sam proportion as for th nominal mony supply. 10. Shocks with a rigid nominal wag: Th rcommndd approach in th us of th graphical vrsion of this modl is mrly to dtrmin whthr any shock, or combination of shocks, is xpansionary or contractionary. A graphical solution for th nw lvl of GD is difficult sinc itrations ar rquird. This is a disadvantag rlativ to th standard AD-AS, IS-LM approach, which gos dirctly to an quilibrium lvl of GD with nominal rigiditis. 19

23 Itrations bgin with th application of th shock or shocks to th graphics on th initial assumption that th labour markt clars. Considr th simplst cas; that of th montary xpansion considrd in th prvious sction. This causs no changs to th dmand sid diagrams but thr is an inflation. Th ffct of this in a labour markt with a fixd nominal wag is thn to rais mploymnt abov th initial quilibrium lvl. 9 Figur 6 w L S w W / 0 0 0, L, A, L, K w W / L D : w ML A, K L L 1 L ) Thus, an unanticipatd montary xpansion is xpansionary of mploymnt and GD. To find th nw lvl of GD, th implications of th labour markt rsult of Figur 6 ar assssd using th dmand sid diagrams of Figur 5. Almost all curvs shift with a ris in output and no chang in th xpctational variabls. Th consquncs ar 9 If th initial lvl of unmploymnt is th minimum fasibl, this implis a transition to gratr us of ovrtim contracts and tmporary immigration. 20

24 1. A rducd long bond yild and an xpandd KA dficit (or rducd KA surplus; xpandd CA surplus or rducd dficit), as savings ris with xpandd GD. 2. Th xpandd CA surplus dprciats th ral xchang rat, which also follows from th nw rlativ abundanc of hom products-srvics compard with forign products-srvics. 3. Th lowr ral intrst rat rducs th opportunity cost of holding mony and so ral mony balancs xpand. Bcaus th nominal mony supply rmains fixd, th scarcity valu of mony riss rlativ to hom goods-srvics and so th pric lvl falls. 4. From (24), th ffct on th nominal xchang rat is indtrminat, sinc th ral xchang rat dprciats and th pric lvl falls. In gnral, this scond itration yilds a smallr nt inflation from th initial montary xpansion th sharing of th ffcts btwn pric and quantity adjustmnts. Furthr itrations ar thn possibl, but ths ar not ndd if all that is rquird is to distinguish xpansionary from contractionary ffcts. Indd, th ky to GD ffcts is th chang in th GD pric lvl,. If an unanticipatd inflation rsults th shock is xpansionary, if th rsult is a dflation, thn th ffct is contractionary. 11. Bond-financd fiscal xpansion: This xrcis illustrats th choic of montary targt. It draws th following conclusions: 1. that unanticipatd fiscal xpansions do rais output and mploymnt if thy ar prmittd to caus unanticipatd inflations but not othrwis, hnc th dpndnc of th rsult on th targt of montary policy 21

25 2. if thy caus inflations, th ffctivnss of fiscal xpansions in raising output and mploymnt is rducd th gratr is financial capital mobility. An unanticipatd, dbt financd ris in G adds to th supply of bonds sking purchas by savrs. Bond prics fall and yilds ris, crowding out som privat invstmnt. Nt inflows on th capital account ris (or bcom lss ngativ in th cas of a capital account dficit) as financial invstors ar attractd to hom bonds and th ral xchang rat apprciats. 10 Th analysis is illustratd in Figur 7. Commncing with th Walrasian rfrnc cas, GD is initially unaffctd and th shock occurs in th financial capital markt. Th ris in G rducs domstic saving and shifts th I-S D or NFI curv to th right. Th highr ral bond yild and th lss ngativ or mor positiv capital account balanc mrg from th financial capital markt. Th ral apprciation thn ariss in th forign xchang markt. In th mony markt th highr bond yild, again assuming no anticipation of any subsqunt inflation, raiss th opportunity cost of holding mony and rducs ral mony balancs. Hr is whr th targt of montary policy mattrs. If th targt is th mony supply itslf, implying that th cntral bank holds th short rat constant, thn thr is an xcss supply of mony so its valu falls rlativ to hom goods-srvics and thr is an inflation. Rturning to th labour markt, this tim with a fixd nominal wag, th inflation is sn to caus a ris in mploymnt and thrfor in GD, so th shock is xpansionary. 10 Of cours, if th shock and its immdiat ffcts ar anticipatd, Ricardian quivalnc ariss and privat saving could ris sufficintly to offst th ffcts of th xpansion. This can b illustratd with th graphical modl but what follows focuss on th unanticipatd cas. 22

26 Figur 7 r r KA(ΔR,,r*) m S m S R r 1 r 1 r 0 r 0 I-S D = NFI, F, G, r c m, D, KA- KA 0 0 KA+ m M ' S ' M S S F 1/ R 1/ R 0 1/ R 1 R E, E * R * CA, CA+ CA 0 CA 1 0 CA- * 23

27 If th targt of montary policy is th pric lvl, say, 11 thn a montary contraction is rquird. Thr is no inflation and hnc no xpansion in mploymnt and GD. Thus, an indpndnt cntral bank that targts product pric stability compltly nullifis th powr of fiscal policy. For th final conclusion, th intrnational mobility of financial capital dpnds on th slop of th KA curv in th financial capital markt. Th flattr this curv (th mor mobil is financial capital or th mor substitutabl ar hom with forign bonds), th smallr th ris in th hom bond yild and hnc th smallr th contraction in ral mony balancs. This mans that, if th targt of montary policy is th mony supply itslf, thn th ncssary inflation is smallr and so is th powr of th fiscal xpansion to rais mploymnt and output. Of cours, thr ar cass in which fiscal xpansions can b xpctd to b ffctiv vn with indpndnt inflation-targting cntral banks. An obvious on is th cas illustratd most strongly during th GFC in th US, th UK and Japan, whr th powr of montary policy was xhaustd th liquidity trap, which fixs th nominal mony supply so that fiscal xpansions hav traction ovr th pric lvl and so can offst dflationary tndncis. Evn if cntral banks rtain traction ovr th pric lvl, thr is also a rol for fiscal policy in circumstancs illustratd at th outst of th GFC, whr pssimism shocks tmporarily rais th shar of saving that gos to mony holdings, thus incrasing th mony shar of th collctiv portfolio. In this cas a ris in th privat saving rat dos not caus an quivalnt spnd on nw capital goods. If govrnmnts can issu bonds to soak up som of that mony accumulation and spnd th procds on hom goods-srvics quickly nough, thy can forstall th downturn. This is a tall ordr for fiscal policy, howvr, which is notoriously slow acting. 11 * Th targt can b th consumr pric lvl, rcognizing that C Av, E 24. Bcaus th xchang rat would apprciat, holding this constant would lad to a GD pric inflation and so h shock would b xpansionary, though by an amount that dpnds on th shar of imports in hom consumption.

28 12. ssimism shock th ffcts of a financial crisis This is a usful illustration of th application of xpctation shocks. Two typs of financial crisis might b considrd. Financial collapss that ar local and isolatd prcipitat capital flights and runs on th hom currncy. Ths ar radily modlld as upward shocks to r*, th forign bond yild, intndd to rprsnt riss in th hom asst risk prmium. Th analysis starts in th financial capital markt with a shift in th KA curv and is, thraftr, quit straightforward. That said, th simplicity of th analysis dos dpnd on th lvl to which th consquncs ar anticipatd and hnc whthr th shock is complicatd by changs in th xpctational variabls. It also dpnds on th complxity of th policy rsponss. In th cas of th Asian financial crisis of , th runs on Asian currncis wr only arrstd onc th currncis had bn forcd to float and by substantial mony-financd fiscal xpansions. That said, all ths shocks ar radily rprsntd. rhaps th bst illustration of th application of xpctations shocks, howvr, is th GFC. It commncd with th ralisation across financial markts that US and UK assts wr ovr-valud and hnc US housholds wr struck by a substantial walth cut. This was xacrbatd by associatd balanc sht problms in ky financial institutions, confidnc in which was suddnly rodd. Whil, during th arly stags of th GFC thr wr lmnts of capital flight, this was not th primary caus of its main conomic impact. Rprsntation in th modl rquirs th following xognous shocks: F : housholds xpct futur disposabl incom to b lowr and thrfor incras saving to smooth consumption forward rc : invstors anticipat lowr futur ral nt rturns on nw capital c, : housholds los confidnc in thir financial institutions and sk gratr liquidity, as wll as a highr cash to dposit ratio 25

29 : financial institutions hdg against runs by holding mor cash on rsrv Th changs in th cash to dposit ratio and th rsrv ratio rducd th mony multiplir and wr th rason th Fd s attmptd montary xpansions smd lik pushing on a pic of string. Short rats would b lowrd and th montary bas xpandd but th mony supply did not ris. But, bfor w can s th ffct of this w must know what happnd to ral mony balancs and for that w nd th ntir dmand sid of th modl. Th shocks ar imposd in Figur 8, assuming that th targt of montary policy is th pric lvl and that th cntral bank is capabl of dfnding it, so. Not that th diagram is hr drawn for a currnt account dficit, in plac of th 0 surpluss rprsntd in Figurs 2, 3, 5 and 7. From Figur 8 it is clar that pssimism on th part of both savrs and invstors causs th I SD NFIF, rc curv to contract to th lft sinc, at any hom bond yild, invstors ar prpard to supply fwr financing bonds and housholds rstrict thir consumption in th currnt priod in ordr to sav for th apparntly infrior futur. Th long bond yild falls, th currnt account dficit falls and th ral xchang rat dprciats. If th cntral bank is abl to dfnd th domstic pric lvl, this indicats that th nominal xchang rat also falls. In th mony markt, incrasd liquidity prfrnc causs th dmand curv to shift to th right and so th quilibrium volum of ral mony balancs xpands du to th lowr opportunity cost of holding mony but that xpansion is mad largr by th incrasd liquidity prfrnc. Th ky qustion now ariss: is th cntral bank capabl of dfnding th pric lvl whn a larg ris in th mony supply is rquird? That this could b a tall ordr is clar from (22), hr r-xprssd: (27) md 1 M S MB is MB is c ms c 26

30 Figur 8 r KA r m S m S r 0 r 0 r 1 r 1 NFI I-S D = F, rc md KA- 0 KA 1 KA 0 KA+ m M 0 S 0 M S 0 1/ R S F 1/ R 1 1/ R 0 R E * CA, CA+ 0 CA 1 CA 0 CA- * 27

31 Not only is th ris in ral mony balancs doubl barrlld but, bcaus th mony multiplir falls, th montary bas must ris by vn mor and hnc th short intrst rat must fall considrably. From this it is not surprising that th US and th UK, whn subjctd to ths shocks in 2008, rachd liquidity traps so quickly. Th nxt qustion is, if a liquidity trap is rachd and th montary bas cannot b raisd furthr by convntional mans thn mony is in xcss dmand and th valu of goodssrvics in trms of mony falls thr is a dflation. In Figur 6 a dflationary shock clarly contracts mploymnt and GD. So, what is to b don? Wll, not that th montary bas, and hnc th ral mony supply, ar stalld. This is th prcis circumstanc undr which a fiscal xpansion was sn in Sction 11 to b xpansionary. That is, th fiscal xpansion in ths circumstancs offsts th dflation and so contributs to limiting th rsulting contraction. 13. Links with th standard AD-AS, IS-LM rprsntation Th algbra that undrlis this modl is standard and so it is not surprising that loci of quilibrium combinations of, and r, or i r, which is what AD, AS, IS and LM ar, follow dirctly from it. Th advantag of th tratmnt offrd hr is that th abstraction of quilibrium loci is not rquird. All diagrams hav tru dmand and supply curvs Th opn conomy aggrgat dmand curv This is th st of combinations of (, ) for which th dmand sid of th conomy (th capital, mony and forign xchang markts) is in quilibrium. It is not an ordinary dmand curv. Also, bcaus th mony supply must b an xognous shiftr of th AD curv, it dos not rprsnt wll th modrn rol of th cntral bank. This is bcaus th mony supply nd not b xognous, and indd it is not if th cntral bank has an altrnativ targt, as in most of th analytical xampls of th prvious sctions. 28

32 To driv th AD curv for th cas whr th cntral bank targts th mony supply, imagin that thr is a supply sid shock so. Th diagrams for th financial capital markt and th mony markt can thn b usd to calculat th associatd chang in th 0 pric lvl, as in Figur 9. Th initial quilibrium combination is, 0. A scond combination ariss whn w hav th ris in GD to 1. At highr GD thr is mor incom and mor saving so, othr things qual, thr is lss xcss dmand for forign funds to financ hom invstmnt, or mor dmand for hom bonds, so highr bond prics and lowr yilds. In th mony markt, lowr opportunity cost, combind with highr transactions dmand, ncssitats incrasd ral mony balancs. With th mony supply xognous this crats xcss dmand for mony rlativ to goods-srvics and so a lowr pric lvl rsults. Figur 9 r r m S 0 KA m S 1 m D ( 1 ) r 0 NFI( 0 ) r 1 m D ( 0 ) NFI( 1 > 0 ) KA- 0 KA 0 KA+ m M S 0 M S 1 29

33 By slcting a rang of supply sid shocks and calculating th chang in th pric lvl for ach a downward sloping AD curv is mappd out. Th shiftrs of th curv ar shown in Figur 10, whr th dirctional signs indicat th ffcts of th shiftrs on th pric lvl for any givn quantity, Aggrgat supply Th Walrasian cas, which fixs th lvls of mploymnt and GD in a claring labour markt, yilds what is oftn rfrrd to as th long run quilibrium in GD and th Figur AD(r c, G, r*,r, R,M S ) 0 1 pric lvl, yilding a vrtical long run aggrgat supply curv. 12 Th commonly drawn short run aggrgat supply curv, SAS, is spcific to a givn fixd nominal wag 12 Sinc th modl is constructd to fit th short run intrval within th gstation priod of invstmnt, th long run offrs many diffrncs in addition to th claring labour markt. This titl is thrfor mislading. It is bttr thought of as th Walrasian aggrgat supply curv. 30

34 rat. It is radily drivd from th production function, not spcifid hr, from (3), as th rlationship btwn GD and th pric lvl for a particular fixd nominal wag, W. (28) W A, L, K w M L,,, L L L L W L W K L LL 13.3 Th IS curv This is simply an altrnativ rprsntation of th financial capital markt, of Figur 2, from which it tracks quilibrium combinations of th lvl of GD and th intrst rat. It is obtaind in th sam way as for th AD curv, by applying supply sid shocks to, which shift th I S D = NFI curv, and obsrving changs in th quilibrium yild on long bonds. Incrasd GD raiss incom and saving, and thrfor th dmand for hom bonds, so it rducs thir yild, rndring th IS curv downward sloping and shiftd by all th xognous variabls that influnc th financial capital markt Th LM curv This is a rprsntation of th mony markt, of Figur 4. Th quantity of ral mony balancs (M S / ) is fixd and GD is shockd. Th long bond yild at which that particular quantity of ral mony balancs would b chosn is thn solvd for. Th gratr is transactions dmand for mony, th highr th opportunity cost must b to justify this choic, and so th LM curv is upward sloping in th intrst rat. Again, th shiftrs includ all th xognous paramtrs in Figur Th Bo curv A common addition to th IS-LM approach for opn conomy macroconomics is th Bo curv. 13 This is usually addd to th IS-LM diagram and, again, it rprsnts combinations (, r) at which thr is a balanc of paymnts (KA=-CA). This curv must 13 This curv was originally addd by Mundll (1963) and Flming (1962). It is clarly xplaind in many txts. Two cognt xampls ar Lvacic and Rbmann (1989) and Wlls (1995). 31

35 pass through th intrsction of th IS and LM curvs sinc thr can b no conomy wid quilibrium without a balanc of paymnts. To nsur that it dos, th xchang rat must b mad ndognous. In standard applications, domstic pric lvls at hom and abroad ar fixd and hnc, whn shocks ar applid, th upward or downward shifts in Bo as it follows th common quilibrium in th financial and mony markts, indicat nominal apprciations or dprciations. This is a clvr addition though, in a flx pric nvironmnt it nds to b formulatd in trms of th ral xchang rat. Onc this is don, howvr, som xtrnal shocks bcom difficult to implmnt. For xampl, a capital flight, stimulatd by a ris in th risk prmium-adjustd forign bond yild, r*, cannot radily b dmonstratd sinc r* is a shiftr in both th IS and Bo curvs. 14. Conclusion Dspit th many and various viws and analytical approachs to macroconomic analysis, th most common approach to training undrgraduat conomics majors is via th AD-AS IS-LM approach with its Kynsian prcpts and its rlianc on graphical rprsntation of quilibrium loci. Hr, a graphical rprsntation is offrd basd on a standard formulation of an undrlying comparativ static macroconomic modl. It taks Walrasian quilibrium as its starting point and considrs nominal rigiditis as spcial cass. It thrfor builds intuition that cntrs on pric rathr than quantity adjustmnt following shocks. In addition, it offrs comparativ as of rprsntation of xtrnal shocks, which ar particularly important in small opn conomis, it uss intuitiv dmand-supply markt diagrams throughout and it provids th ability to st as clar targts for montary policy th xchang rat, th CI and th GD pric. Finally, it allows for forward xpctations so that it offrs usful insights for studnts into th conomic consquncs of financial shocks. 32

36 Rfrncs Blanchard and Shn, Macroconomics: Australian Edition, arson/rntic Hall. Fnstra, R.C. and A.M. Taylor, Intrnational Macroconomics, Nw ork: Worth ublishrs. Flming, J.M., Domstic financial policis undr fixd and undr flxibl xchang rats, Intrnational Montary Fund Staff aprs, 9: Hall, R.E. and J.B. Taylor, Macroconomics, 3 rd Edition, W.W. Norton. Hicks, J.R., Mr Kyns and th Classics : a suggstd intrprtation, Economtrica, 5: , IS-LM: an xplanation, Journal of ost Kynsian Economics, 3: Lvacic, R. and A. Rbmann, Macroconomics: An Introduction to Kynsian- Noclassical Controvrsis, Macmillan. Mankiw, N. G., Macroconomics, Fifth Edition, Nw ork: Worth ublishrs. Mundll, R.A., Capital mobility and stabilisation policy undr fixd and flxibl xchang rats, Canadian Journal of Economics and olitical Scinc, 29: Smith, B., Introduction to Macroconomics, arson Australia. Rs, L. and R. Tyrs, Trad rform in th short run: China s WTO accssion, Journal of Asian Economics 15(1): 1-31, January-Fbruary. Robrts, I. and R. Tyrs, China s xchang rat policy: th cas for gratr flxibility, Asian Economic Journal, 17(2): Tyrs, R., China aftr th crisis: th lmntal macroconomics, Asian Economic Journal, 15(2): , August. Tyrs, R. and L. Rs, On th robustnss of short run gains from trad libralisation, Discussion apr D 474, Cntr for Economic olicy Rsarch, Australian National Univrsity. Wlls, G., Macroconomics, Mlbourn: Thomas Nlson. Williamson, S., Macroconomics, Fourth Edition, Boston MA: arson Addison- Wsly. 33

37 D NUMBER AUTHORS ECONOMICS DISCUSSION AERS 2009 TITLE L, A.T. ENTR INTO UNIVERSIT: ARE THE CHILDREN OF IMMIGRANTS DISADVANTAGED? Wu,. CHINA S CAITAL STOCK SERIES B REGION AND SECTOR Chn, M.H. UNDERSTANDING WORLD COMMODIT RICES RETURNS, VOLATILIT AND DIVERSIFACATION Vlagic, R. UWA DISCUSSION AERS IN ECONOMICS: THE FIRST McLur, M. ROALTIES FOR REGIONS: ACCOUNTABILIT AND SUSTAINABILIT Chn, A. and Gronwold, N. REDUCING REGIONAL DISARITIES IN CHINA: AN EVALUATION OF ALTERNATIVE OLICIES Gronwold, N. and Haggr, A. THE REGIONAL ECONOMIC EFFECTS OF IMMIGRATION: SIMULATION RESULTS FROM A SMALL CGE MODEL Clmnts, K. and Chn, D. AFFLUENCE AND FOOD: SIMLE WA TO INFER INCOMES Clmnts, K. and Maspp, M. A SELF-REFLECTIVE INVERSE DEMAND SSTEM Jons, C. MEASURING WESTERN AUSTRALIAN HOUSE RICES: METHODS AND IMLICATIONS Siddiqu, M.A.B. WESTERN AUSTRALIA-JAAN MINING CO-OERATION: AN HISTORICAL OVERVIEW Wbr, E.J. RE-INDUSTRIAL BIMETALLISM: THE INDEX COIN HTHESIS McLur, M. ARETO AND IGOU ON OHELIMIT, UTILIT AND WELFARE: IMLICATIONS FOR UBLIC FINANCE Wbr, E.J. WILFRED EDWARD GRAHAM SALTER: THE MERITS OF A CLASSICAL ECONOMIC EDUCATION Tyrs, R. and Huang, L. COMBATING CHINA S EXORT CONTRACTION: FISCAL EXANSION OR ACCELERATED INDUSTRIAL REFORM Zwifl,., laff, D. and Kühn, J. IS REGULATING THE SOLVENC OF BANKS COUNTER- RODUCTIVE? Clmnts, K. THE HD CONFERENCE REACHES ADULTHOOD McLur, M. THIRT EARS OF ECONOMICS: UWA AND THE WA BRANCH OF THE ECONOMIC SOCIET FROM 1963 TO Harris, R.G. and Robrtson,. TRADE, WAGES AND SKILL ACCUMULATION IN THE EMERGING GIANTS ng, J., Cui, J., Qin, F. and Gronwold, N. STOCK RICES AND THE MACRO ECONOM IN CHINA Chn, A. and Gronwold, N. REGIONAL EQUALIT AND NATIONAL DEVELOMENT IN CHINA: IS THERE A TRADE-OFF? 34

38 D NUMBER AUTHORS ECONOMICS DISCUSSION AERS TITLE Hndry, D.F. RESEARCH AND THE ACADEMIC: A TALE OF TWO CULTURES McLur, M., Turkington, D. and Wbr, E.J. A CONVERSATION WITH ARNOLD ZELLNER Butlr, D.J., Burbank, V.K. and Chisholm, J.S. THE FRAMES BEHIND THE GAMES: LAER S ERCETIONS OF RISONER S DILEMMA, CHICKEN, DICTATOR, AND ULTIMATUM GAMES Harris, R.G., Robrtson,.E. and Xu, J.. THE INTERNATIONAL EFFECTS OF CHINA S GROWTH, TRADE AND EDUCATION BOOMS Clmnts, K.W., Mongy, S. and Si, J. THE DNAMICS OF NEW RESOURCE ROJECTS A ROGRESS REORT Costllo, G., Frasr,. and Gronwold, N. HOUSE RICES, NON-FUNDAMENTAL COMONENTS AND INTERSTATE SILLOVERS: THE AUSTRALIAN EXERIENCE Clmnts, K. REORT OF THE 2009 HD CONFERENCE IN ECONOMICS AND BUSINESS Robrtson,.E. INVESTMENT LED GROWTH IN INDIA: HINDU FACT OR MTHOLOG? Fu, D., Wu,. and Tang,. THE EFFECTS OF OWNERSHI STRUCTURE AND INDUSTR CHARACTERISTICS ON EXORT ERFORMANCE Wu,. INNOVATION AND ECONOMIC GROWTH IN CHINA Stphns, B.J. THE DETERMINANTS OF LABOUR FORCE STATUS AMONG INDIGENOUS AUSTRALIANS Davis, M. FINANCING THE BURRA BURRA MINES, SOUTH AUSTRALIA: LIQUIDIT ROBLEMS AND RESOLUTIONS Tyrs, R. and Zhang,. ARECIATING THE RENMINBI Clmnts, K.W., Lan,. and Sah, S.. THE BIG MAC INDEX TWO DECADES ON AN EVALUATION OF BURGERNOMICS Robrtson,.E. and Xu, J.. IN CHINA S WAKE: HAS ASIA GAINED FROM CHINA S GROWTH? Clmnts, K.W. and Izan, H.. THE A ARIT MATRIX: A TOOL FOR ANALSING THE STRUCTURE OF A Gao, G. WORLD FOOD DEMAND Wu,. INDIGENOUS INNOVATION IN CHINA: IMLICATIONS FOR SUSTAINABLE GROWTH Robrtson,.E. DECIHERING THE HINDU GROWTH EIC Stvns, G. RESERVE BANK OF AUSTRALIA-THE ROLE OF FINANCE

39 10.21 Widmr,.K., Zwifl,. and Farsi, M. ACCOUNTING FOR HETEROGENEIT IN THE MEASUREMENT OF HOSITAL ERFORMANCE McLur, M. ASSESSMENTS OF A. C. IGOU S FELLOWSHI THESES oon, A.R. THE ECONOMICS OF NONLINEAR RICING: EVIDENCE FROM AIRFARES AND GROCER RICES Halprin, D. FORECASTING METALS RETURNS: A BAESIAN DECISION THEORETIC AROACH Clmnts, K.W. and Si. J. THE INVESTMENT ROJECT IELINE: COST ESCALATION, LEAD-TIME, SUCCESS, FAILURE AND SEED Chn, A., Gronwold, N. and Haggr, A.J. THE REGIONAL ECONOMIC EFFECTS OF A REDUCTION IN CARBON EMISSIONS Siddiqu, A., Slvanathan, E.A. and Slvanathan, S. REMITTANCES AND ECONOMIC GROWTH: EMIRICAL EVIDENCE FROM BANGLADESH, INDIA AND SRI LANKA 36

40 D NUMBER AUTHORS ECONOMICS DISCUSSION AERS 2011 TITLE Robrtson,.E. DEE IMACT: CHINA AND THE WORLD ECONOM Kang, C. and L, S.H. BEING KNOWLEDGEABLE OR SOCIABLE? DIFFERENCES IN RELATIVE IMORTANCE OF COGNITIVE AND NON-COGNITIVE SKILLS Turkington, D. DIFFERENT CONCETS OF MATRIX CALCULUS Golly, J. and Tyrs, R. CONTRASTING GIANTS: DEMOGRAHIC CHANGE AND ECONOMIC ERFORMANCE IN CHINA AND INDIA Collins, J., Bar, B. and Wbr, E.J. ECONOMIC GROWTH AND EVOLUTION: ARENTAL REFERENCE FOR QUALIT AND QUANTIT OF OFFSRING Turkington, D. ON THE DIFFERENTIATION OF THE LOG LIKELIHOOD FUNCTION USING MATRIX CALCULUS Gronwold, N. and atrson, J.E.H. STOCK RICES AND EXCHANGE RATES IN AUSTRALIA: ARE COMMODIT RICES THE MISSING LINK? Chn, A. and Gronwold, N. REDUCING REGIONAL DISARITIES IN CHINA: IS INVESTMENT ALLOCATION OLIC EFFECTIVE? Williams, A., Birch, E. and Hancock,. THE IMACT OF ON-LINE LECTURE RECORDINGS ON STUDENT ERFORMANCE awly, J. and Wbr, E.J. INVESTMENT AND TECHNICAL ROGRESS IN THE G7 COUNTRIES AND AUSTRALIA Tyrs, R. AN ELEMENTAL MACROECONOMIC MODEL FOR ALIED ANALSIS AT UNDERGRADUATE LEVEL Clmnts, K.W. and Gao, G. QUALIT, QUANTIT, SENDING AND RICES Tyrs, R. and Zhang,. JAAN S ECONOMIC RECOVER: INSIGHTS FROM MULTI-REGION DNAMICS McLur, M. A. C. IGOU S REJECTION OF ARETO S LAW Kristoffrsn, I. THE SUBJECTIVE WELLBEING SCALE: HOW REASONABLE IS THE CARDINALIT ASSUMTION? Clmnts, K.W., Izan, H.. and Lan,. VOLATILIT AND STOCK RICE INDEXES arkinson, M. SHANN MEMORIAL LECTURE 2011: SUSTAINABLE WELLBEING AN ECONOMIC FUTURE FOR AUSTRALIA 37