Centre for Applied Macroeconomic Analysis

Research Programs

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The research activities of the Centre are built around a series of Research Programs headed by a Program Director (or Directors). The Program Director will be responsible for organizing research in a particular area. Proposals for new programs are welcome and will be considered by the Executive Committee. Proposals should be directed to the Centre Director. It is envisaged that Programs will be for three years after which they will be reviewed. The responsibilities of the Program Directors can be found here.

1. Macroeconomic Theory
2. Finance and the Macroeconomy
3. Multi-Country Models and Methods
4. Macroeconomic Policy Frameworks
5. Macro-econometric Models and Methods
6. Managing Globalisation
7. Economic Growth and Development
8. Climate Change and Energy
9. Macroeconomics and Longer Run Issues
10. Behavioural Macroeconomics

1. Macroeconomic Theory

This program brings together various research agendas in the area of theoretical macroeconomics. The emphasis is on (i) the construction of macroeconomic models that have well-specific decision-theoretic foundations and equilibrium concepts; and/or (ii) the use of such models to understand observed economic phenomena, analyse policy regimes and other institutional features; and/or (iii) research that refines and expands the set of tools for undertaking research in (i) and (ii).

Research in this area includes equilibrium business cycle theories, growth theory, recursive policy games, recursive contract theory, dynamic public finance, international macroeconomics, expectations modelling and learning, sunspots and multiple equilibria in general equilibrium, search theoretic foundations of labor markets and monetary theory, and dynamic political economics.

The program's activities include:

* The annual Australasian Workshop in Macroeconomic Dynamics (WMD).
* Macroeconomics Study Group.
* Occasional advanced workshop/courses featuring experts in the relevant field.

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2. Finance and the Macroeconomy

Financial market developments impact directly and indirectly on real economy outcomes, particularly in the short term, and developments in the macroeconomy affect financial markets, systems and institutions. This program brings together work on financial interactions with an assessment of the impact of markets and institutions on the economy and implications for policy. It includes assessment of broader trends in the macroeconomy and finance. Areas of investigation include:

• The role of international financial markets in transmitting shocks between economies, including during periods of financial stress.
• Regional and global financial cooperation and architecture, with a particular focus on East Asia.
• Financial markets, institutions and systems, including the integration of financial markets, electronic finance, harmonisation of financial systems and the nexus between finance and economic growth and development.
• Policy dialogue and the interaction between policy decisions, such as fiscal and monetary policy and structural policies, and financial development, including a focus on East Asia.

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3. Multi-Country Models and Methods

Countries are linked through trade flows and asset markets. The modeling of these interactions has been undertaken in large scale model such as: computable general equilibrium models (for trade); large scale macro-econometric models (aggregated trade and capital flows); and intertemporal general equilibrium models (trade detail and asset flows). There is also an emerging literature of smaller theoretical simulation models particularly of real business cycle and new Keynesian theories which attempt to understand global interdependence better. This program will bring together researchers interested in the linkages between countries and how these linkages impact on our understanding of economic outcomes in small open and large open economies.

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4. Macroeconomic Policy Frameworks

Considerable progress has been made over the past twenty years in developing robust monetary and fiscal policy frameworks. For many countries these have been aimed at maintaining low and stable inflation over the medium term, and public debt sustainability over the medium to long term. Associated implications and areas of importance have been less well developed.

This program will bring together analytical and policy researchers interested in evaluating and advancing work in areas such as:

• The implications of medium-term fiscal and monetary policy frameworks for: the volatilities of output, interest rates and exchange rates; short run stabilisation policies; intergenerational balance; financial stability; and external stability;

• The role of Governance procedures and associated institutional frameworks, in sustaining the credibility of fiscal and monetary policy frameworks, including the relative roles for policy coordination and operational independence, and the role of enforcement rules in fiscal policy frameworks;

• Macroeconomic policy frameworks for sustainable growth and employment; and
  
• Appropriate policy frameworks for common currency regimes.
  
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5. Macro-econometric Models and Methods

Models of the macro economy range from those which have a strong emphasis upon understanding the mechanisms that might be at work, and so tend to be towards the theoretical end of the spectrum, to those which are better regarded as purely statistical models that attempt to provide a close match to the data. Where the emphasis is placed by an investigator often depends upon the use to which they will be put.

The objective of the program is to pursue research into the design of macro-econometric models, to develop techniques to assist in this process, to evaluate the finished product and to examine their role in forecasting and the analysis of economic processes.

The program includes:

• The link between theoretical and statistical models.
• Business cycles.
• Macro-economic models used in the forecasting process.
• An investigation of VAR macroeconomic models.

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6. Managing Globalisation

The linkages between countries are influenced by their macroeconomic policies. These policies can be conducted so as to reduce risks and increase the likelihood of good outcomes.

The objective of this program is to undertake research into design of policies in three areas. The first of these is the overall framework of macroeconomic policy, including the extent to which policy can influence exchange rates in a world of a high degree of capital mobility, and the integration of fiscal and monetary policy in the management of the economy. The second is the extent to which the financial system can be regulated so as to minimise the risk of currency and financial crises, and to lessen the costs of such crises as occur. The third is the way in which the liberalisation of international trade can be managed so as to avoid the growth of preferential discrimination between countries, and the growth of discriminatory trading blocs.

Research in this program will also be conducted into the connection between these areas: the extent to which trade liberalisation strategies demand a change to exchange rate strategies, and the extent to which the need to minimise the risks of financial crises has implications for exchange rate strategies.

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7. Economic Growth and Development

The program focuses on the following key areas:

• Should short-run macroeconomic models for developing countries be different from the received doctrine? Evaluation, critique and extensions of alternative models such as those due to structuralists and to IMF-type policy evaluations. Are there eclectic short-run macroeconomic models better suited for developing countries? Empirical evaluation of the performance of alternative short-run macroeconomic models.
• The political economy of the nexus between fiscal and monetary policy in developing countries. The interaction between a weak banking system, overly controlled central bank, excessive current government spending and poor tax design and administration. Early warning systems on potential crisis. The role of the exchange rate regime.
• The determinants of economic growth and developing countries. Can we identify policies that would enhance growth prospects for developing countries? What evidence relevant to developing countries does the experience of OECD countries in regard to long-term growth and medium-term fluctuation provide?
• The macroeconomics of reconstruction after war and other disasters. Anticipating and dealing with the economic consequence of 'hot spots' - mass migration in response to war, environmental disasters and the like.

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8. Climate Change and Energy

Rapid global economic growth, particularly in China and India, has important implications for global energy use as well as causing a rapid rise in greenhouse gas emissions with implication for climate change.   This program focuses on the importance of energy use and climate change as well as the associated policy responses on the macro-economy. 

This program focuses on:

- Methodologies for projecting long term energy use and carbon dioxide emissions

- The relationship between macroeconomic performance and energy use

- The role of relative prices in energy demand and macroeconomic outcomes

- The macroeconomic consequences of alternative energy polices

- The macroeconomic consequences of alternative climate change strategies

- The design and impact of alternative emission permit trading systems

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 9. Macroeconomics and Longer Run Issues

This program covers a range of topics focusing on longer run issues in macroeconomics such as:

(a) Macroeconomics and Health

The program focuses on macroeconomic approaches to measuring the economic burden of infectious diseases such as SARS, Avian Flu, Influenza, HIV/AIDS etc. It is becoming increasingly evident that modern epidemics create global economic shocks that by far exceed direct and indirect costs of treatment.  The program will combine CGE and epidemiological modelling to study both short-and-long-run effects of the disease outbreak. Epidemiological models of disease dynamics will take into account an increased likelihood of contact with infected individuals from other areas as a result of trade in goods and services and of an increased factor mobility.

Key focus areas are:

• A choice of an appropriate epidemiological model for a particular type of infectious disease;
• Incorporation of public health and spatial data into CGE framework;
  Modelling sectoral impacts from a particular disease;
• Scenario analysis using probabilistic assumptions about the likely effects of the disease, and
• Recommendations on optimal response and intervention measures based on model implications

 (b) Macroeconomics and Aging

Demographic change has important impacts on the macro economy through changes in labour supply, human wealth accumulation, consumption and saving decisions, asset accumulation, investment demand and adjustment of asset prices.  There are also important impacts on fiscal positions and the balance of payments.  The objective of this program is to explore the macroeconomic implications of an aging society within a variety of modeling frameworks.

(c) Macroeconomics and the Environment

Environmental change has potentially significant macroeconomic impacts both directly through the links between the environment and economics activity and indirectly through the impact on the macro economy of policies aimed at environmental outcomes such as climate change policy.  This sub program will explore the links between changes in the environment and macroeconomics outcomes.

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10. Behavioural Macroeconomics

Behavioural macroeconomics seeks to refine our understanding of the discipline by accounting for relevant features of human behaviour that are absent in the standard economics framework. Instead of assuming a hyper-rational representative agent, the basis for analysis are empirically well-documented psychological and sociological factors such as cognitive bias, reciprocity fairness, herding, and social status. Finance theorists have long acknowledged that individuals are bounded in many dimensions, in particular in their rationality, self-control and self-interest. Other economic sub-disciplines, however, have been slow to appreciate the growing econometric and experimental evidence that human behaviour often fails the predictions of the rational expectations, full-information paradigm. Behavioural macroeconomics is still in its infancy but is rapidly making inroads into the mainstream.

This research program provides an umbrella for all research dedicated to melding the insights from behavioural economics and psychology with modern macroeconomics in a sound and rigorous way. The emphasis is both on theoretical and empirical models:

i) Theoretical models will analyse the positive and normative macroeconomic implications of behavioural phenomena including, for example, prospect theory, hyperbolic discounting, adaptive learning, bounded rationality, habit/status concerns, money illusion, and endowment effects. An integral part of this research agenda is the problem of aggregation and the presence of agent heterogeneity.

ii) Empirical models will use behavioural theory to improve our statistical understanding and forecasting abilities of the macroeconomy and to analyse policy regimes and institutional features.

These models are not only supposed to refine our understanding of individual choice but also help us understand and design better economic institutions and enhance overall welfare analysis.

The program seeks to foster a strong and growing network of researchers enthusiastic about behavioural macroeconomics. Activities will include workshops/conferences on behavioural macroeconomics, collaboration with other CAMA research programs, and graduate courses/seminars on this topic.

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