RDP 2008-07: A Medium-scale Open Economy Model of Australia 5. Conclusion

This paper outlines a DSGE model with a sizeable number of frictions and rigidities and estimates it using Australian data. The model appears to fit the data reasonably well. We found that both domestic and foreign shocks are important drivers of the Australian business cycle.

There are questions that remain for future work. First, given the prominent role attributed to the rest of the world, it would be worth analysing the foreign block of the model in structural form instead of an atheoretical vector autoregression. Second, while we have estimated the model only over the inflation-targeting period, more information about the model's deep parameters might be extracted from the data by using a sample that begins at the time that the exchange rate was floated. This could be achieved by allowing for a break in the policy reaction function at the time of the introduction of inflation targeting.