Research Discussion Paper – RDP 7601 A Minimal Model of the Australian Economy


This paper presents the preliminary results of a project to examine the contribution of some recent innovations in macroeconomic modelling. The model discussed in this paper is rather smaller than most macroeconometric models. It puts particular emphasis on the role of monetary disequilibrium. Relatively sophisticated econometric methods are used to estimate the parameters of the model, with quarterly data from 1959 to 1974. A higher degree of theoretical consistency than usual is imposed upon the specification. It is impossible at this stage to evaluate the contribution of each of these features of the work, but we shall endeavour to do so in the future. Related papers are being prepared on the nature and role of price expectations within the model, an analysis of policy reaction functions and a version of the model estimated with a longer run of annual data. The models developed in the project are to be used in the analysis of issues such as our current inflationary experience.

The authors would like to acknowledge the stimulus derived from their colleagues, especially those associated with the International Monetary Research Program at the London School of Economics, in the Reserve Bank of Australia and other institutions in Australia. Particular acknowledgement is due to Victor Argy, Bruce Bacon, Matthew Butlin, Michael Danes, Peter Dixon, Harry Johnson, Neil Johnston, Bob Hawkins, Jim Henderson, Lesley Moore, Philip Norman, Michael Porter, Alan Powell, Don Stammer and John Taylor. Many comments on the model were made at the Conference in Applied Economic Research held at the Reserve Bank of Australia in September 1976, and several points were raised which will be investigated in future work. The current paper is a progress report, and none of the above, nor of course the Reserve Bank of Australia, is responsible for any errors or the choices made at several points in constructing the model.