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The endogeneity of monetary policy in Australia, 1961-1974


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Bennett, PA 1978 , 'The endogeneity of monetary policy in Australia, 1961-1974', Research Master thesis, University of Tasmania.

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The aim of this thesis is to analyse the setting of the
individual monetary policy instruments by the Australian monetary authorities
over the period 1961-1974. The motivation for the analysis of such an issue
stems from the increasing interest in monetary economics and the growing
sophistication of the Australian capital market. The rapid increase in the
money stock from 1973 onward has emphasized the need for more direct controls
on the growth of the money supply. Successful control depends on a working
knowledge of the behaviour of the instruments required.
the analysis of the setting o:f individual policy instruments is
pursued in order to determine whether the monetary authorities set the
instruments endogenously and in response to movements in policy targets, or
whether they set the instruments independently. If the instrument setting
is found to be endogenous, several related issues arise: the possible
assignment of the instruments, the interdependence between the instruments
and the temporal stability of the policy responses.
Before attempting to accomplish this aim, two chapters are devoted
to a review of monetary-fiscal literature and previous reaction function
estimation. These chapters serve as a background to the problem at hand.
The monetary-fiscal debate brings to light two related issues - reverse
causation and the identification problem. The reverse causation argument
concerns the issue of whether the money stock is the cause or effect of
economic activity. If it is the cause, then the money supply can be
treated as exogenous. Alternatively, if it is the effect, then the
money supply should be treated endogenously. The identification problem
relates to the issue of how the variables are defined and identified. The
success of the empirical tests in the monetary-fiscal debate depends upon
this issue. The review of the previous reaction function studies provides
an insight into the identification problem. Each of these studies has attempted to define the variables in the most suitable way. Although none
of these earlier formulations are exactly suited to the present problem, they
serve to provide valuable background.
In Chapter 4, a simple model of money supply determination is used
to identify the appropriate monetary instruments for the Australian economy.
The reaction functions are then formulated and the problems of data and
estimation are discussed. The regression results are discussed in Chapter 5.
Results are also presented for the time period split into the contractionary
and expansionary phases of economic policy. The differing response of the
instruments to each policy target is observed. This test is an important
aspect of the more general problem of temporal stability of the reaction
functions. The problem ts examined by applying the TIMVAR technique and
identifying the various periods of instability.
Much of the observed instability is obviously due to the changing
weights on the targets during different phases of monetary policy. The SRD
function is analysed in terms of the movement in Australia's economic cycle.
It is observed that there is a close connection between the periods of
instability in the function and movements in the cycle. A similar analysis
is carried out for the securities function, this time in terms of the movement
in the level of foreign reserves. In this case, however, the connection is no
as obvious or specific. The results of this analysis are presented in
Chapter 6.
In Chapter· 7, the policy implications of the analysis are discussed.
It is felt that more work in this area is warranted, especially in regard to
the determination of response lags.

Item Type: Thesis - Research Master
Authors/Creators:Bennett, PA
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