Centre for Applied Macroeconomic Analysis Working Papers (CAMA)

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Access status: Open Access ,
When Words Are Not Enough: Emotional Spillovers from Fed Chair Communication to Global Financial Markets
(2026-10-14) Yiru Chen; Muhammad Ali Nasir; Xingjie Wei
Given the important role of the Federal Reserve Chair, their communications may generate substantial cross-border effects on international financial markets. Building on this perspective, this article investigates whether emotional signals conveyed by the Fed Chair during FOMC post-meeting press conferences generate emotional spillovers to global financial markets. Using press conferences held between 2011 and 2025, we construct multimodal emotional indices from textual, vocal, and facial cues using machine learning techniques, and examine their high-frequency effects on exchange rates and equity markets across six major economies. Using local projection methods with minute-level event windows, the results show that Fed Chair emotional signals have immediate and economically significant impacts on global financial markets. Among different modalities, facial and textual emotions exhibit stronger and more robust effects than vocal signals. In particular, positive emotional cues are generally associated with increases in equity ETF returns, while exchange rate responses display substantial cross-country heterogeneity, with emerging market currencies tending to appreciate. We also provide evidence that the effects of emotional cues are non-additive and depend on cross-modal interactions, with vocal signals conditioning the impact of textual and facial emotions. Moreover, the findings show that the transmission of emotional spillovers is shaped by macro-financial vulnerability and global risk conditions. On the one hand, economies with higher vulnerability exhibit stronger responses to emotional shocks, indicating that macro-financial vulnerability acts as a moderating mechanism. However, the effects of emotional signals, especially facial and textual emotion, are amplified during periods of higher global uncertainty. Our main findings remain robust across several robustness checks. In particular, for vocal and facial emotions, coefficient equality is not rejected in 85.8% and 78.3% of the market horizon comparisons, respectively, indicating that the main findings are not systematically driven by the choice of emotion extraction algorithms.
Access status: Open Access ,
Shocks, Competitiveness, and Bilateral Real Exchange Rates in the Euro Area
(Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, 2026-10-09) Stefan Hohberger
This paper analyses the structural drivers of bilateral real exchange rate dynamics within the euro area and between the euro area and the United States over 1999–2025, using an estimated seven-country New Keynesian DSGE model of the world economy. The model features an ex ante identical structure across the country blocs and is estimated on a unified information set. International financial market shocks dominate the EA–US bilateral real exchange rate dynamics, with productivity differentials generating persistent euro appreciation pressure. Rising world demand and a secular decline in EA home bias exert partially offsetting euro depreciation pressure. Within the monetary union, the pre-crisis appreciation of France, Italy, and Spain relative to Germany reflects country-specific combinations of demand, supply, and trade disturbances that broadly unwind after 2008. Trend productivity differentials emerge as the dominant low-frequency driver, most starkly for Italy, where persistently slower trend productivity growth drives the bilateral real exchange rate through the sample. Model validation against empirical moments, exchange rate pass-through benchmarks, and off-model indicators confirms the empirical plausibility of the structural identification.
Access status: Open Access ,
Ancestral Distance and the Cultural Foundations of State Capacity
(Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, 2026-10-01) Trung V. Vu
This study investigates the role of long-term population relatedness in shaping global variation in state capacity. It argues that longer periods of ancestral separation are associated with greater divergence in intergenerationally transmitted civic norms governing voluntary compliance with state institutions. Ancestral distance may also hinder the international diffusion of effective state institutions, contributing to persistent cross-country differences in state capacity. The empirical analysis shows that countries with greater ancestral distance from the global frontier of effective state institutions exhibit lower state capacity. Dyadic regressions further indicate that ancestral distance is associated with greater divergence in state capacity. To examine a potential cultural foundation of this relationship, I exploit variation in cultural backgrounds among second-generation immigrants residing in the same country. I find that immigrant populations with greater ancestral distance exhibit larger differences in self-reported attitudes towards voluntary tax compliance. Taken together, the findings suggest that ancestral distance is an important historical predictor of cross-country disparities in state capacity, consistent with a role for divergence in civic norms and barriers to institutional diffusion.
Access status: Open Access ,
Forecasting Indian Core Inflation: Simple Made Simpler
(Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, 2026-09-25) Rishabh Choudhary; Chetan Dave; Chetan Ghate
Managing rapid economic growth in India naturally brings into focus the role of inflation forecasts for monetary and fiscal policy making. We investigate whether any of a large set of forecasting models improves upon a univariate auto-regression in forecasting core consumer price inflation. Using a monthly panel of forty macroeconomic and financial indicators we estimate nine classes of models that range from an auto-regression to various factor models, quantile regressions and machine learning specifications. In doing so, we also account for inflation expectations and climate change variables. Our root mean square forecast error model comparison metric operates at horizons of one, three, six and twelve months. With respect to the conditional mean, no model produces a forecast error significantly below that of an auto-regression at any horizon over the full comparison sample. With respect to the conditional distribution, quantile regressions that include estimated factors reduce forecast loss relative to a specification without such factors at every quantile and horizon. Our approach is general enough to be applicable to forecasting core inflation in other emerging market economies.
Access status: Open Access ,
Impact of Merchant Battery Energy Storage on Electricity Prices: The Case of Australia
(Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, 2026-09-21) Daniel Davi-Arderius; Rabindra Nepal; Tooraj Jamasb
Whether merchant arbitrage acts as a counter force to the "merit order effect" of solar and wind is important, but little is explored in the Australian National Electricity Market (NEM). This study fills this gap by studying the impact of charging and discharging stand-alone Battery Energy Storage Systems (BESS) on spot electricity prices considering their rapid recent growth in the wholesale electricity market. Australia is a global leader in BESS, and this study context is also relevant to other countries decarbonizing their energy mix. We use 5-minute wholesale price data between 2024 and 2025 and apply Quantile Regressions with instrumental variables. We find that stand-alone BESS has impact on spot-prices, but the effect is asymmetric: charging BESS increases the spot price, while discharging them decreases the spot price and thus driving self-cannibalisation. The net impact of charging and discharging on the electricity prices on consumer prices can be negative, especially under large scale penetration of BESS. The findings also offer some policy recommendations.
Access status: Open Access ,
Sign Restrictions and Supply-Demand Decompositions of Inflation
(Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, 2026-09-23) Matthew Read
Sign restrictions on the slopes of supply and demand curves are often used to identify historical decompositions in structural vector autoregressions. I show that the identifying power of these restrictions depends on both reduced-form parameters and realised forecast errors. Consequently, unlike many other structural objects, the strength of identification cannot be assessed from reduced-form parameters alone. Empirically, identified sets for historical decompositions of US inflation are typically largely uninformative, both in aggregate and in most expenditure categories. Existing inflation decompositions are therefore sensitive to auxiliary assumptions used to select among observationally equivalent models.
Access status: Open Access ,
Expectations-Based Capital Inflow Shocks
(Centre for Applied Macroeconomic Analysis, 2026-09-15) Jongrim Ha; Dohan Kim; M. Ayhan Kose; Francis E. Warnock; University of Virginia
Identifying the impact of capital inflows on output is challenging because inflows are forward-looking and respond to expectations about future economic conditions. We develop a new measure of capital inflow shocks using a simple and broadly applicable expectations-based framework that isolates the unexpected component of inflows by purging movements predicted by professional forecasters’ expectations. Estimates using the new measure for 27 emerging market economies indicate that capital inflows have sizable expansionary effects on output, operating through stronger domestic consumption and investment and easier financing conditions. Additional analysis indicates that equity-type inflows generate greater and more persistent effects than debt-type inflows, while large inflow reversals result in more pronounced effects than comparable increases in inflows. These results are robust to a wide range of alternative specifications.
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Real-time forecasting of the Australian macroeconomy using flexible Bayesian VARs
(Crawford School of Public Policy, The Australian National University, 2020-04) Zhang, Bo; Nguyen, Bao H.
This paper evaluates the real-time forecast performance of alternative Bayesian Vector Autoregressive (VAR) models for the Australian macroeconomy. To this end, we construct an updated vintage database and estimate a set of model specifications with different covariance structures. The results suggest that a large VAR model with 20 variables tends to outperform a small VAR model when forecasting GDP growth, CPI inflation and unemployment rate. We find consistent evidence that the models with more flexible error covariance structures forecast GDP growth and inflation better than the standard VAR, while the standard VAR does better than its counterparts for unemployment rate. The results are robust under alternative priors and when the data includes the early stage of the COVID-19 crisis.
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Estimation in non-linear non-Gaussian state space models with precision-based methods
(Crawford School of Public Policy, The Australian National University, 2012-01) Chan, Joshua C. C.; Strachan, Rodney W.
In recent years state space models, particularly the linear Gaussian version, have become the standard framework for analyzing macroeconomic and financial data. However, many theoretically motivated models imply non-linear or non-Gaussian specifications ?or both. Existing methods for estimating such models are computationally intensive, and often cannot be applied to models with more than a few states. Building upon recent developments in precision-based algorithms, we propose a general approach to estimating high-dimensional non-linear non-Gaussian state space models. The baseline algorithm approximates the conditional distribution of the states by a multivariate Gaussian or t density, which is then used for posterior simulation. We further develop this baseline algorithm to construct more sophisticated samplers with attractive properties: one based on the accept-reject Metropolis-Hastings (ARMH) algorithm, and another adaptive collapsed sampler inspired by the cross-entropy method. To illustrate the proposed approach, we investigate the effect of the zero lower bound of interest rate on monetary transmission mechanism.
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Bayesian estimation of DSGE models
(Crawford School of Public Policy, The Australian National University, 2012-01) Guerrun-Quintana, Pablo A.; Nason, James M.
We survey Bayesian methods for estimating dynamic stochastic general equilibrium (DSGE) models in this article. We focus on New Keynesian (NK)DSGE models because of the interest shown in this class of models by economists in academic and policy-making institutions. This interest stems from the ability of this class of DSGE model to transmit real, nominal, and ?scal and monetary policy shocks into endogenous ?uctuations at business cycle frequencies. Intuition about these propagation mechanisms is developed by reviewing the structure of a canonical NKDSGE model. Estimation and evaluation of the NKDSGE model rests on being able to detrend its optimality and equilibrium conditions, to construct a linear approximation of the model, to solve for its linear approximate decision rules, and to map from this solution into a state space model to generate Kalman ?lter projections. The likelihood of the linear approximate NKDSGE model is based on these projections. The projections and likelihood are useful inputs into the Metropolis-Hastings Markov chain Monte Carlo simulator that we employ to produce Bayesian estimates of the NKDSGE model. We discuss an algorithm that implements this simulator. This algorithm involves choosing priors of the NKDSGE model parameters and ?xing initial conditions to start the simulator. The output of the simulator is posterior estimates of two NKDSGE models, which are summarized and compared to results in the existing literature. Given the posterior distributions, the NKDSGE models are evaluated with tools that determine which is most favored by the data. We also give a short history of DSGE model estimation as well as pointing to issues that are at the frontier of this research.
Access status: Open Access ,
Regulatory stress tests and bank responses
(Crawford School of Public Policy, The Australian National University, 2020-03) Janda, Karel; Kravtsov, O.
In this paper, we investigate how the regulatory stress test framework in the European Union affects banks' investment decisions and portfolio choices. Using the causal inference and event study methodology, we document a substantial impact of EU-wide stress tests in 2011, 2014 and 2016 on the banks' portfolio strategies. The banks subject to regulatory stress tests tend to structure their portfolios with lower risk assets that is reflected in a decline in risk-weighted assets as compared to the control group. At the same time, the dynamic of realized risk that is measured by the proportion of non-performing exposure in portfolios remains unaffected. The estimates based on two alternative subsamples indicate that the magnitude of such effect rise with the increase in the size of the bank´s assets.
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A comparison of monthly global indicators for forecasting growth
(Crawford School of Public Policy, The Australian National University, 2020-04) Baumeister, Christian E.; Guerin, Pierre
This paper evaluates the predictive content of a set of alternative monthly indicators of global economic activity for nowcasting and forecasting quarterly world GDP using mixed-frequency models. We find that a recently proposed indicator that covers multiple dimensions of the global economy consistently produces substantial improvements in forecast accuracy, while other monthly measures have more mixed success. This global economic conditions indicator contains valuable information also for assessing the current and future state of the economy for a set of individual countries and groups of countries. We use this indicator to track the evolution of the nowcasts for the US, the OECD area, and the world economy during the coronavirus pandemic and quantify the main factors driving the nowcasts.
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Multi-product firms and product quality expansion
(Crawford School of Public Policy, The Australian National University, 2020-04) Pham, Van; Woodland, Alan
This paper develops and analyzes a model of international trade comprising multiproduct firms that can produce a range of product varieties distinguished by quality. First, it analyses the within-firm distribution of product quality and argues that firms export decisions are sensitive to their sizes and their product quality level. Specifically, a firm successfully exports both its high-end products and low-end products. Also, the sales of its top-end products relative to sales of its lower-end products is sensitive to the extent to which effective labour costs rise with quality. Second, the paper explores the heterogeneous effects of trade liberalization on multi-product firm behaviour and quality range choices. Under trade liberalization, small domestic firms experience a shrinkage of their product quality range, while even the new small-sized exporters narrow their product quality range to focus on an export variety. In contrast, existing exporters (large firms) can compete on both price and quality under trade liberalization by expanding their export product range toward both the low-end and high-end varieties. There is a greater expansion toward the lower-end varieties relative to the higher-end varieties under trade liberalization, this relative expansion decreasing as the variable trade cost decreases.
Access status: Open Access ,
Understanding the deviations of the Taylor Rule: A new methodology with an application to Australia
(Crawford School of Public Policy, The Australian National University, 2014-04) Hudson, Kerry B.; Vespignani, Joaquin L.
This investigation aims to explain and quantify the deviations of the Taylor Rule. A novel three-step econometric procedure designed to reflect the data-rich environment in which central banks operate is proposed using information for 229 macroeconomic series. This procedure can be applied to data for any economy with inflation targeting monetary rule. Our application with Australian data shows that approximately 65% of Australia's deviation from the Taylor Rule can be explained systematically, with international factors and a domestic factor accounting for 41.9% and 22.5% respectively of the total variation in deviation from the rule. Australian deviation from the Taylor Rule is also associated with the deviation of the US´s Taylor Rule, indicating that the Reserve Bank of Australia appears to be following an international monetary policy trend set forth by the world's largest economy.
Access status: Open Access ,
Surfing a wave of economic growth
(Crawford School of Public Policy, The Australian National University, 2017-02) McGregor, T.; Wills, S.
We investigate whether the geographic determinants of growth extend to natural amenities. We combine data on spatial and temporal variation in the quality of over 5000 surf breaks globally with data on local economic performance, proxied by night-time lights. We document a strong association between natural amenity quality and local economic development. Economic activity grows faster near good surf breaks
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Monetary policy with a state-dependent inflation target in a behavioral two-country monetary union model
(Crawford School of Public Policy, The Australian National University, 2020-04) Proano, C. R.; Lojak, B.
In this paper we study the implementation of a state-dependent inflation target in a two-country monetary union model characterized by boundedly rational agents. In particular, we use the spread between the actual policy rate (which is constrained by the zero-lower-bound) and the Taylor rate (which can become negative) as a measure for the degree of ineffectiveness of conventional monetary policy as a stabilizing mechanism. The perception of macroeconomic risk by the agents is assumed to vary according to this measure by means of the Brock-Hommes switching mechanism. Our numerical simulations indicate a) that a state-dependent inflation target may lead to a better macroeconomic and inflation stabilization, and b) the perceived risk-sharing among the monetary union members influences the financing conditions of the member economies of the monetary union.
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News shocks under financial frictions
(Crawford School of Public Policy, The Australian National University, 2020-04) Gertz, Christoph; Tsoukalas, John D.; Zanetti, Francesco
We examine the dynamic effects and empirical role of TFP news shocks in the context of frictions in financial markets. We document two new facts using VAR methods. First, a (positive) shock to future TFP generates a significant decline in various credit spread indicators considered in the macro-finance literature. The decline in the credit spread indicators is associated with a robust improvement in credit supply indicators, along with a broad based expansion in economic activity. Second, VAR methods also establish a tight link between TFP news shocks and shocks that explain the majority of un-forecastable movements in credit spread indicators. These two facts provide robust evidence on the importance of movements in credit spreads for the propagation of news shocks. A DSGE model enriched with a financial sector generates very similar quantitative dynamics and shows that strong linkages between leveraged equity and excess premiums, which vary inversely with balance sheet conditions, are critical for the amplification of TFP news shocks. The consistent assessment from both methodologies provides support for the traditional 'news view' of aggregate fluctuations.
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Bayesian state space models in macroeconometrics
(Crawford School of Public Policy, The Australian National University, 2020-04) Chan, Joshua C. C.; Strachan, Rodney W.
State space models play an important role in macroeconometric analysis and the Bayesian approach has been shown to have many advantages. This paper outlines recent developments in state space modelling applied to macroeconomics using Bayesian methods. We outline the directions of recent research, specifically the problems being addressed and the solutions proposed. After presenting a general form for the linear Gaussian model, we discuss the interpretations and virtues of alternative estimation routines and their outputs. This discussion includes the Kalman filter and smoother, and precision based algorithms. As the advantages of using large models have become better understood, a focus has developed on dimension reduction and computational advances to cope with high-dimensional parameter spaces. We give an overview of a number of recent advances in these directions. Many models suggested by economic theory are either non-linear or non-Gaussian, or both. We discuss work on the particle filtering approach to such models as well as other techniques that use various approximations - to either the time t state and measurement equations or to the full posterior for the states - to obtain draws.
Access status: Open Access ,
The impact of gender equality policies on economic growth
(Crawford School of Public Policy, The Australian National University, 2016-02) Kim, Jinyoung; Lee, Jong-Wha; Shin, Kwanho
This paper introduces a model of gender inequality and economic growth that focuses on the determination of women's time allocation among market production, home production, child rearing, and child education. The theoretical model is based on Agénor (2016), but differs in several important dimensions. The model is calibrated using microlevel data of Asian economies, and numerous policy experiments are conducted to investigate how various aspects of gender inequality are related to the growth performance of the economy. The analysis shows that improving gender equality can contribute significantly to economic growth by changing females' time allocation and promoting accumulation of human capital. We find that if gender inequality is completely removed, aggregate income will be about 6.6% and 14.5% higher than the benchmark economy after one and two generations respectively, while corresponding per capita income will be higher by 30.6% and 71.1% in the hypothetical gender-equality economy. This is because fertility and population decrease as women participate more in the labor market.
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Age-dependent risk aversion: Re-evaluating fiscal policy impacts of population ageing
(Crawford School of Public Policy, The Australian National University, 2020-04) Poonpolkul, P.
This study revisits optimal fiscal policies in response to population ageing by introducing an age-dependent increasing risk aversion assumption into an OLG model with risk-sensitive preferences. Under this specification, the policy evaluation factors in the welfare cost of policy-induced uncertainties and suggests that, based on future generations' welfare, financing population ageing by either reducing social security benefits or extending the retirement age may not be as strongly preferred over raising the payroll tax rate as prior studies have suggested. Varying risk aversion also emphasizes the role of precautionary savings that causes individuals to respond slightly differently to changes in demographic structures and price variables. This, in turn, influences the redistribution of life-cycle variables and transition dynamics of aggregate variables.

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