Business Cycle Properties and Marco Forecasting of the Australian Essay

Business Cycle Properties and Marco Forecasting of the Australian Economy - Essay Example Unemployment is a countercyclical variable but may also perform as a leading indicator of GDP. The prospects for Australia are encouraging. The country’s economy has sustained one of the longest, most progressive runs in the world as cited by the IMF, and despite the recent slump in housing prices, a slight rise in exports and relative weakness in the Australian dollar, the prospects appear encouraging for the country as its macroeconomic variables show stability even through the global economic crisis. Although interest rates had risen somewhat in the past, the government intends to continue lowering interest rates to encourage consumption spending, which according to this study will likely spur continued economic expansion. Introduction The health of the economy of any country is dependent upon the insightful and timely application of the appropriate economic policies by the governing authority. However, deciding on which policy to adopt and the manner in which it should be implemented are not easily discernible by mere intuition. Reliance on the measurement of certain macroeconomic variables is crucial to forecasting the possible directions the economy may take, whether the implemented policies are helpful in propelling the economy towards the desired goal, or whether they are detrimental to the economic welfare of the nation. This report provides a cursory examination of Australia’s macroeconomic variables and their behaviour, with the aim of determining their usefulness in providing insight into the future directions of the Australian economy, as well as their effectiveness as tools in discerning the appropriate economic policy to be adopted to ensure progress. Ten variables are specified consisting of productivity, investment, expenditure, and nominal variables, so as to determine their relationship to GDP as the measure of economic health and viability. During the course of the correlational studies, the nominal variables including broad mo ney supply, inflation, long-term and short-term interest rates, and currency exchange rates, were tested and found uncorrelated with GDP. As a modification of the original study by Fisher, Otto and Voss (1996), this study further sought to correlate the four aforementioned monetary variables with M3 in an attempt to determine whether or not they exerted any influence upon each other. It will be noted that interest rates and currency exchange rates were tools of monetary policy, while inflation rate is a vital price indicator, all of which are related in theory to money supply. The supporting graphs showing superimposed correlated variables are shown in the Appendices A to J, for both the quarter-to-quarter growth rates as well as the quarterly year-on-year (YOY) growth rates. Macroeconomic variables, their cyclicality and indicator properties Several macroeconomic and monetary variables exhibit cyclicalities as a result of their being correlated with the output. The following table shows the resulting correlational coefficients of each of the variables with their respective output. The first set of variables consists of monetary variables which are the subject of monetary policy employed by the government to control the money supply in the market, which in turn determines the inflation rate. Too much money chasing too few products usually results in accelerated