RESEARCH DISCUSSION PAPERS

A Medium-scale Open Economy Model of Australia

Jarkko Jääskelä, Kristoffer Nimark

RDP2008-07

December 2008

We estimate an open economy dynamic stochastic general equilibrium (DSGE) model of Australia with a number of shocks, frictions and rigidities, matching a large number of observable time series. We find that both foreign and domestic shocks are important drivers of the Australian business cycle. We also find that the initial impact on inflation of an increase in demand for Australian commodities is negative, due to an improvement in the real exchange rate, though there is a persistent positive effect on inflation that dominates at longer horizons.