The cost of capital is the minimum rate of return that an investment project must earn in order to cover its funding costs and any tax liabilities. Australian studies on this subject have produced a wide range of estimates. This paper demonstrates that a wide range of outcomes can result from...

In the second half of 1997 many Asian emerging economies suffered large declines in both their currency and equity markets. This Asian financial turmoil arose primarily from three interrelated sets of factors, namely: shortcomings in the financial sector at a time when global liquidity...

This paper presents a small model of the Australian macroeconomy. The model is empirically based, aggregate in nature and consists of five estimated equations – for non-farm output, the real exchange rate, import prices, unit labour costs and consumer prices. The stylised facts underlying each...

The length of the transmission lags from monetary policy to output has been the subject of much research over the years, but there are serious problems in isolating the lags with any precision. This paper uses a simple model of Australian output to estimate the length of the lags, and then...

Inflation in the 1990s in most industrial countries is lower and less variable than at any time in the past quarter of a century. Economic theory predicts that, other things equal, this decline in inflation variability should lead to less volatility in both bond and foreign exchange markets. The...

While economic theory is largely mute on the question of whether macroeconomic policies affect long-run growth, an examination of the experience of different countries over various periods and the policies they pursued, lends strong support to the idea that macro policies do play a role in the...

We present a simple model of the macroeconomy that includes a role for an asset-price bubble, and derive optimal monetary policy settings for two policy-makers. The first policy-maker, a sceptic, does not attempt to forecast the future possible paths for the asset-price bubble when setting...

The output gap – the difference between actual and potential output – is widely regarded as a useful guide to future inflationary pressures, as well as an important indicator of the state of the economy in its own right. Since the output gap is unobservable, however, its estimation is prone...

In this paper we discuss the development of Phillips curves in Australia over the forty years since Phillips first estimated one using Australian data. We examine the central issues faced by researchers estimating Australian Phillips curves. These include the distinction between the short and...

This paper explores the relationship between the terms of trade and inflation. It shows, both analytically and empirically, that the exchange rate response to a change in the terms of trade is crucial to the inflation outcome. It suggests the existence of a ‘threshold’ exchange rate...