RDP 9105: Inflation in Australia: Causes, Inertia and Policy Appendix 2: Data Methods and Sources

Methods

We use the growth rate of the GDP deflator as our measure of the inflation rate. (For Japan and the US we use the GNP Deflator.) This measure is affected less by changes to indirect tax regimes and administered prices than the CPI. Our measure of money is MI, defined as private non-bank sector notes and coins plus current deposits. We measure wages as an index of average wage rates.

Total factor productivity is defined as the Solow residual from a Cobb-Douglas production function i.e.

where z is total factor productivity, y is GDP (GNP), k is the real capital stock, n is total employment and σ is the average profit share for the period 1962 – 1989. (y, k and n are measured as natural logarithms). Growth rates are denoted by a · above the variable.

For each of the five countries an index of world prices expressed in domestic currency terms was calculated as follows:

(i) The GDP deflator for each country was rebased to a common base year of 1985. A world price index I_WP, measured in foreign currency prices was calculated as

where I_USA, I_JAPAN, I_GER and I_UK are the rescaled GDP (GNP) deflators described above.

I_WP was used as a measure of world prices for Australia and New Zealand. For each of the USA, UK and Japan a world price index was calculated as I_WP excluding the respective domestic component.

(ii) Exchange rates for five currencies against the USD (the Japanese yen (JPY), the Australian dollar (AUD), the New Zealand dollar (NZD), the Deutsche Mark(DEM) and the Pound Sterling (GBP)) were rescaled to a common base year of 1985.

An index of the domestic price of foreign currency (FC) was compiled for each of the five countries under study. For Australia, the index was computed as

The NZD index was computed with the same weights against the same four major currencies. For the USD price of foreign currency, the index consisted of JPY, DEM and GBP components and similarly for the JPY, DEM and GBP indexes.

(iii) For each country, an index of world prices measured in domestic currency terms was computed by multiplying the current world price index by the appropriate exchange rate index. For instance, for Australia, this index is given by:

Log differences of Q were then used as a measure of world inflation in domestic currency.

Sources

Real GDP (Y): All real GDP series taken from “Gross National/Domestic Product: Volume”, in OECD Economic Outlook.

Employment (N): All employment series are from “Total Employment” from OECD Economic Outlook.

Inflation (π): All series for inflation are log differences of “Deflator for GDP at Market Prices” from OECD Economic Outlook.

Real Capital Stock (K): All series from “Capital Stock” in OECD Economic Outlook.

Profit Share (σ): All series from “Profit Share” from OECD Economic Outlook.

Money (M): All series from International Financial Statistics, line 34. The data have been adjusted for breaks in the series for Australia in 1988, New Zealand in 1987 and the United Kingdom in 1987 and 1989.

Exchange Rates (E): All series are period average rates with the US dollar from International Financial Statistics, “Market Rate/Par or Central Rate”. Australia, UK and NZ data is from line “ah” while data for Germany and Japan are from line “af”.

Wages (W): The wages series for the different countries are from different sources.

Australia : Index of Average Weekly Earnings Series from the ABS. Since 1982 the series is all persons while prior to this date it is a male equivalent series.

Japan: “Monthly Earnings: Manufacturing” index taken from OECD Main Economic Indicators.

UK, USA: “Wage Rate” index from OECD Economic Outlook.

NZ: “Prevailing Weekly Wage Rates” index from OECD Main Economic Indicators.