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A Factor Model Analysis of the Australian Economy and the Effects of Inflation Targeting

Luke Hartigan () and James Morley ()

No 2019-10, Working Papers from University of Sydney, School of Economics

Abstract: Based on a dynamic factor model for a dataset with more than one hundred variables, we find that macroeconomic fluctuations in Australia can be largely captured by two common factors. However, the factor structure changed soon after the introduction of inflation targeting in the 1990s, resulting in a large reduction in cross-sectional variation related to these common factors. Estimates from a block exogenous factor augmented vector autoregressive model suggest that the transmission and responsiveness of monetary policy also changed, with policy both more effective and responsive to the potential inflationary impacts of shocks following the introduction of inflation targeting.

Keywords: inflation targeting; monetary policy; factor modelling; structural change; impulse response functions (search for similar items in EconPapers)
Date: 2019-07, Revised 2019-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: A Factor Model Analysis of the Australian Economy and the Effects of Inflation Targeting (2020) Downloads
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