RDP 2000-05: A Small Model of the Australian Macroeconomy 6. Summary

The aim of this paper has been to outline a small model of the Australian macroeconomy. The value of such a model lies in providing a simple framework with which to analyse and quantify short- to medium-term macroeconomic developments, including in particular, the effects of monetary policy on the economy. It also potentially aids in the construction of forecasts for some of the main macroeconomic aggregates of interest to policymakers.

The model is empirical and highly aggregate in nature and rests upon several stylised facts about the Australian economy over the past fifteen years. The estimated equations in the model encompass both short-run dynamics and longer-run steady-state relationships, with restrictions imposed in several of the equations to generate steady-state behaviour that accords with our theoretical expectations.

Dynamic simulations have also been included in the paper to illustrate the response of the variables in the model to changes in monetary policy and to a range of shocks. The model, which is sufficiently small that the results can be understood intuitively, represents a convenient way to summarise the main macroeconomic interrelationships in the Australian economy.