How Australia Has Been Affected by US Monetary and Fiscal Policies: 1960 to 2022

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

I am sending you my report on the article with reference number and title:  How Australia is Affected by US Monetary and Fiscal Policies: 1960 to 2022” 

This paper investigates the extend and determinants of business cycle synchronisation among the US states, during the ten years 2002-2011. The Reiterative Truncated Projected Least Squares to estimate the effects of US monetary and fiscal policy on Australia using quarterly data between 1960 to 2022. When Australia had a fixed exchange rate (1960-1983), both US fiscal and Monetary policy was correlated with an increase in Australia’s GDP which fits the predictions of a small country IS/LM/BP model with relatively immobile capital. When Australia had a flexible exchange rate (1984-2022), US fiscal policy helped Australia but US monetary policy hurt Australia, which fits the predictions of a large country IS/LM/BP model.

In general, the paper is interesting, and it is a well organised in terms of distributing the work among the relevant sessions; however, there are some important points that need to be considered in order to become publishable. The following specific comments should help the author(s) in this task.

1. The model used by the authors is well chosen and adequately described.
2. However, a Session should be devoted to empirical literature review providing if any similar empirical contributions, so as at the end to compare results.

 

 

3.      The most important remark is that the authors should better highlight the contribution of this study to the existing literature, either in terms of methodological approach or in terms of novelty of the findings, policy suggestions and the lessons that can be drawn.

Author Response

In general, the paper is interesting, and it is a well organised in terms of distributing the work among the relevant sessions;

                    Thank you.

however, there are some important points that need to be considered in order to become publishable. The following specific comments should help the author(s) in this task.

1. The model used by the authors is well chosen and adequately described.

Thank you.

1. However, a Session should be devoted to empirical literature review providing if any similar empirical contributions, so as at the end to compare results.

I have never seen published articles that test the large country IS/LM/BP predictions other than Leightner (forthcoming).  I have added a brief literature survey on articles that have been published about Australia’s exchange rate. Its determinants and its effects. Please see lines 78-87.

1. The most important remark is that the authors should better highlight the contribution of this study to the existing literature, either in terms of methodological approach or in terms of novelty of the findings, policy suggestions and the lessons that can be drawn.

I have moved what used to be in the conclusion into the results section and written a new conclusion.  The conclusion now says:

 

This paper added to the literature in several ways. It is only the second paper to empirically test the large country IS/LM/BP (Mundell-Fleming) predictions for a country that switched from a fixed to a flexible exchange rate.  The first empirical test of this model (Leightner, forthcoming) used data from Korea and found that all four IS/LM/BP predictions fit the data – (1, 2) US monetary policy increased Korea’s GDP when Korea had a fixed exchange rate but decreased Korea’s GDP when Korea had a flexible exchange rate and (3, 4) increases in US fiscal policy hurt Korea when Korea had a fixed exchange rate and helped Korea when Korea had a flexible exchange rate. This paper confirmed these results for when Australia had a flexible exchange rate but found that both US fiscal and monetary policy increased Australia’s GDP when Australia had a fixed exchange rate. Although inconsistent with a ‘large’ country IS/LM/BP model, the Australia-under-a-fixed-exchange-rate results are consistent with a ‘small’ country IS/LM/BP model where capital is relatively immobile.  Furthermore, an assumption of relatively immobile capital fits the historical record for Australia when she had a fixed exchange rate. Therefore this paper adds to the literature by being the first paper to produce evidence that the large country IS/LM/BP model predictions do not fit every country that has a fixed exchange rate.

Leightner (forthcoming) and this paper are also the first two papers to hold some independent variables constant when using reiterative truncated projected least squares (RTPLS). Most importantly, this paper found that during world recessions the positive effects of US fiscal and monetary policies on Australia diminish while the negative effects of US fiscal and monetary policies increase.  Thus just when Australia most needs positive spillover effects from US economic policies, these effects decline. The empirical estimates provided in this paper should help Australian authorities manage Australia’s economy in such a way that accounts for the effects of US policies on Australia’s GDP.

Reviewer 2 Report

Comments and Suggestions for Authors

With specific regard to the article "How Australia is affected by US monetary and fiscal policies: 1960 to 2022" (jrfm-2845903), I clearly see its value-added and its innovativeness. However, I suggest to polish the paper hete and there. For instance, it might be useful to get some figures (i.e., not just Table 1) showing how M1 evolved from 1960 to 2022 but maybe also data on Government spending in the US. At the same time, it would be interesting to see how the Australian exchange rate evolved during those 62 years, since several "de iure" fixed exchange rates are "de facto" more or less "de facto" floating ones. Moreover, I am unsure whether it is appropriate to list where applications of RTPLS can be found (i.e., in which journals) without analysing/reviewing the papers (i.e., without referring to a specific author/date). I also suggest to revise some terms like "awkward" or in my opinion too emphatic statements like those at the beginning of the Conclusions (which should in turn also wrap up the main results instead of solely providing new ones). Finally, I feel that the author could also easily make the reference list a little bit more complete.

Author Response

With specific regard to the article "How Australia is affected by US monetary and fiscal policies: 1960 to 2022" (jrfm-2845903), I clearly see its value-added and its innovativeness.

                    Thank you.

However, I suggest to polish the paper here and there.

1. For instance, it might be useful to get some figures (i.e., not just Table 1) showing how M1 evolved from 1960 to 2022 but maybe also data on Government spending in the US. At the same time, it would be interesting to see how the Australian exchange rate evolved during those 62 years, since several "de iure" fixed exchange rates are "de facto" more or less "de facto" floating ones.

I have done this. I added Figures 3, 4, and 5.  I also added the following text (lines 246-262):

As explained above, the large country Mundell-Fleming model would predict that USA monetary policy and fiscal policy would have opposite effects on Australian GDP when Australia had a fixed (1960-1983) versus flexible (1984-2022) exchange rate.  However, a fixed exchange rate that is adjusted optimal amounts very frequently can act similar to a flexible exchange rate. Figure 5 shows that Australia did not adjust its fixed exchange rate optimal amounts frequently enough to imitate a flexible exchange rate. The earliest exchange rate data that I could find for Australia was from the Reserve Bank of Australia, and it started in July of 1969.  Figure 5 shows a clear difference between before and after December 1983. Australia’s exchange rate clearly varied up and down much more after December 1983 than before. After December 1983 Australia’s exchange rate shows no periods of “stair steps” like staying at 1.19 US dollar per Australian dollar for December 1971 to November 1972, or 1.42 US dollar per Australian dollar for February 1973 to August 1973, or 1.49 US dollar per Australian dollar for September 1973 to August 1974. Although the stair step pattern in Australia’s exchange rate stopped in August 1974, the remainder of Australia’s fixed exchange rate regime followed a downward trend that is not repeated during Australia’s flexible exchange rate regime in terms of the size of the fall or consistency of the fall.²

Also, I added Endnote 2 which says, “According to the Bank for International Settlements (n.d.), the Australian dollar was fixed to the British pound for 1931 to 1971, to the US dollar for 1971 to 1974, and to a basket of trade related currencies for 1974 to 1976.  The reason Figure 5 does not show a “stair step” pattern for the US$/(Australian dollar) after August 1974 is because Australia was no longer pegging just to the US dollar. In November 1976, Australia devalued its dollar by 17.5 percent relative to its basket of currencies. From 1976 to 1983, Australia used a crawling peg.  However, Figure 5 clearly shows that even when Australia was using a crawling peg, she was not changing her exchange rate optimal amounts frequently enough to imitate a flexible exchange rate.

2. Moreover, I am unsure whether it is appropriate to list where applications of RTPLS can be found (i.e., in which journals) without analysing/reviewing the papers (i.e., without referring to a specific author/date).

I have deleted the paragraph listing those journals.

3. I also suggest to revise some terms like "awkward" or in my opinion too emphatic statements like those at the beginning of the Conclusions (which should in turn also wrap up the main results instead of solely providing new ones).

I replaced the word “awkward” with “confusing” and added the following explanation:

The numeric values for d(Australia’s GDP)/d(US M1) are confusing to interpret because the money supply data used is an index with June 2015 = 100 (in June 2015 a one unit change in M1 is the same as a one percent change in M1; but a one unit change in the M1 index in July of 1960 when the M1 index was 4.6633 is equivalent to a 21.44 percent change in M1).

I also moved what used to be in the conclusion into the results section.  Finally, I wrote a new conclusion that “wraps up the main results.”

4. Finally, I feel that the author could also easily make the reference list a little bit more complete.

I have added 4 more references.  In the paper they appear on lines 78 to 87 and 194.

Reviewer 3 Report

Comments and Suggestions for Authors

I think that the question address is important and that the paper should be considered for publication in JRFM. I have several recommendations:

1) The presentation of the econometric method could be shortened. No need to enumerate where it has been published.

2) It is not clear what actually is estimated. The equation should be stated clearly and the alternative results presented in a table which is easy to be read.

3) Table 1 should be in an Appendix. Only the multiplier over years should be in the main text.

4) Alternative econometric methods should be used.

Author Response

I think that the question address is important and that the paper should be considered for publication in JRFM.

                    Thank you.

I have several recommendations:

• The presentation of the econometric method could be shortened. No need to enumerate where it has been published.

I significantly shortened the presentation of the econometric method, and I deleted the paragraph listing the journals that have published RTPLS applications.

• It is not clear what actually is estimated. The equation should be stated clearly and the alternative results presented in a table which is easy to be read.

Lines 299 to 314 say, “In order to see how omitted variables have affected d(Australia’s GDP)/d(USA’s G) and d(Australia’s GDP)/d(USA’s M1) under Australia’s fixed then flexible exchange rates, the influence of the other included independent variables was purged from the data on Australia’s GDP (the dependent variable, Y) before RTPLS was used (Leightner, 2015).  Specifically, and based upon the above OLS preliminary regressions, the dependent variable used in the RTPLS process for d(Australia’s GDP)/d(USA’s G) from 1960 through 1983 is given in equation (12), and for 1984 through 2022 is given in equation (13). The dependent variable used in the RTPLS process for d(Australia’s GDP)/d(USA’s M1) from 1960 through 1983 is given in equation (14), and for 1984 through 2022 is given in equation (15).  

Y purged = Australia’s GDP – [3.1634 AG + 4729.2 AM1 + 62.582 USM1]                                    (12)

Y purged = Australia’s GDP – [4.0251AG – 182.58 AM1 – 66.978 USM1]                        (13)

Y purged = Australia’s GDP – [3.1634 AG + 4729.2 AM1+ 0.046437 USG]                    (14)

Y purged = Australia’s GDP – [4.0251AG – 182.58 AM1 + 0.19435 USG]                        (15)

The RTPLS process was applied four times – once for each of the equations (12) through (15) using the data that corresponds to each individual equation.”

This clearly states what is the dependent variable in each RTPLS estimation.  Furthermore, for any estimated slope, dY/dX, the X in the denominator is the independent variable.  Thus, the quote above clearly identifies the independent variables.  Moreover, lines 185 through 207 clearly explain the RTPLS estimation process. 

3) Table 1 should be in an Appendix. Only the multiplier over years should be in the main text.

Table 1 lists the empirical results (not the data).  To clarify this, I have given Table 1 a new and clearer title.  I have also clarified the column headings.

4) Alternative econometric methods should be used.

What alternative econometric method should I use?  To use traditional regressions I would need to “develop, justify, and estimate every equation in an international model that included every force that could affect Australia’s and the US’s GDP, exchange rates, interest rates, etc” (line 159- 161; see also lines 34-65).  Doing so would require an entire book.  The JRFM gave me only 10 days to make these revisions. I do not have the time needed to use an “alternative econometric method.”  Even if I had the time, the resulting paper would be too long.

Round 2

Reviewer 3 Report

Comments and Suggestions for Authors

The authors have responded to all the issues raised by the reviewers.