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Associate Professor Gordon Menzies

Biography

Dr Gordon Menzies joined UTS as a Senior Lecturer in Economics in 2003 and is a member of the Centre for Applied Macroeconomic Analysis (ANU). Since joining UTS he has developed a research program investigating rapid belief changes in markets, with Prof Daniel Zizzo at the University of East Anglia (UK). Together, they won the Arrow Senior Prize for the best paper in Berkeley Electronic Press in 2009 (http://www.bepress.com/arrow.html).

Since 2007 he has been the Deputy Director of the UTS Paul Woolley Centre for Capital Market Dysfunctionality. His main publications are in the areas of macroeconomics, trade and exchange rates. He has also published on the Economics of the Family, and on the cultural impact of the economic way of thinking.

Gordon completed a BEc(Hons) at the University of New England, after which he joined the Reserve Bank of Australia to work on the Bank's macroeconomic model. He won a Bank scholarship to study at the Australian National University, where he won the Robert Jones Prize for the best Masters student.

After a number of years working in the Reserve Bank of Australia in the Economic Research Department, he won a Commonwealth Scholarship to undertake a D Phil at Oxford University. His thesis was on the Asian Financial Crisis, focussing particularly on Indonesia.

He has taught econometrics at UNE, economics at the ANU and was senior Economics Tutor at Christ Church College, Oxford. Since joining UTS he has taught econometrics and international economics.

He won the 2008 UTS individual teaching award, and, a 2009 Australian Learning and Teaching Council citation for “[challenging] students to understand diverse perspectives, and to see a ‘human’ side to International Economics”.

Image of Gordon Menzies
Associate Professor, Economics Discipline Group
Associate Member, QFRC - Quantitative Finance
DipEd (UNE), BEc (Hons) (UNE), MEc (ANU), DPhil (Oxford)
Member, Economic Society of Australia
Download CV  (PDF 368 Kb, 3 pages)
Phone
+61 2 9514 7728

Research Interests

Macroeconomics, International Economics, Econometrics, Economic Modelling, Monetary Economics, Development Economics.

Can supervise: Yes

Macroeconomics, International Economics, Econometrics, Statistics, Monetary Economics, Development Economics.

Chapters

Hay, D. & Menzies, G.D. 2015, 'Is the Model of Human Nature in Economics Fundamentally Flawed? Seeking a Better Model of Human Behaviour' in Theology and Economics: A Christian Vision of the Common Good, Palgrave Macmillan, New York, pp. 183-198.
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Menzies, G.D. & Hay, D. 2014, 'Human nature, identity, and motivation' in Paul Oslington (ed), Christianity and economics, Oxford University Press, Oxford, UK, pp. 581-605.
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Menzies, G.D. 2008, 'Economics as identity' in Harper, I. & Gregg, S. (eds), Christian Theology and Market Economics, Edward Elgar, UK, pp. 94-109.
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Menzies, G.D. & Zizzo, D. 2008, 'Rational expectations' in Darity, W. (ed), International Encyclopedia of the Social Sciences, Macmillan, USA, pp. 51-53.
Menzies, G.D., Terry, C. & Trayler, R.M. 2005, 'Waiting for capital: the impact of corruption in Indonesian financial markets' in Gup, B.E. (ed), Capital Markets, Globalization, and Economic Development, Springer, New York, USA, pp. 175-191.
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Conferences

Menzies, G.D., Henckel, T. & Zizzo, D. 2010, 'Threshold pricing in a noisy world', Seminar Presentation, Australian National University, Canberra, Australia.
Henckel, T., Menzies, G.D., Prokovnik, N. & Zizzo, D. 2010, 'Central bank trustworthiness and inferential expectations', Behavioural Finance Group Conference: Fairness, Trust and Emotions in Finance, LOndon, UK.
Menzies, G.D. 2009, 'Pricing setting under inferential expectations', Conference on Behavioural Macroeconomics: Theory and Policy Implications, Sydney, Australia.
Henckel, T., Menzies, G.D. & Zizzo, D. 2009, 'Pricing setting under inferential expectations', Seminar Presentation, Queensland University of Technology, Brisbane, Australia.
Menzies, G.D. 2008, 'DSGE models overview', Seminar Presentation, Centre of Policy Studies, Monash University, Melbourne, Australia.
Hay, D. & Menzies, G.D. 2008, 'Economic and the marriage wars', Annual Meeting of the Allied Social Science Associations, New Orleans, USA.
Menzies, G.D. & Thorp, S.J. 2008, '"The storyboard approach to lectures and presentations" and "Peer feedback: A pilot study" Teaching tools from the international teachers programme', Seminar Presentation, School of Finance and Economics, University of Technology, Sydney, Sydney, Australia.
We give two short presentations. The first shows how to build persuasive and coherent visual presentations using the Storyboard Approach. The second describes and demonstrates the power of peer feedback for teaching development using our own recent experience from a pilot project. Please come and join the discussion.
Menzies, G.D., Zizzo, D., Henckel, T. & Prokhovnik, N. 2008, 'Central bank credibility under inferential expectations', 13th Australasian Macroeconomics Workshop, Sydney, Australia.
Menzies, G.D. 2007, 'Inferential expectations', International Conference on Macroeconomics and Finance, Rethymnon, Greece.
Menzies, G.D. 2006, 'Should economic analysis have limits? The example of marriage and divorce', Seminar Presentation, School of Finance and Economics, University of Technology, Sydney, Sydney, Australia.
Menzies, G.D. 2004, 'Core western values', -, Humans and machines conference, -, Sydney, Australia.
Menzies, G.D. & Zizzo, D. 2004, 'Inferential expectations', Proceeding of the Australian Conference of Economists 2004, Australian Conference of Economists 2004 - 33rd Conference of Economists, The Economics Society of Australia, Sydney, Australia, pp. 1-39.
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Menzies, G.D. 2004, 'Inferential expectations', Seminar Presentation, School of Finance and Economics, University of Technology, Sydney, Sydney, Australia.
Menzies, G.D. 2003, 'First-best debt relief', Seminar Presentation, School of Finance and Economics, University of Technology, Sydney, Sydney, Australia.
Dvornak, N., Kohler, M. & Menzies, G.D. 2003, 'Australia's medium term real exchange rate: A macroeconomics balance approach', UNSW CAER Summer Macroeconomics Workshop, UNSW CAER Summer Macroeconomics Workshop, Sydney, Australia.
Menzies, G.D. 2000, 'Debt forgiveness: The case for hyper-incentive contracts', Seminar Presentation, School of Finance and Economics, University of Technology, Sydney, Sydney, Australia.

Journal articles

Menzies, G.D., Xiao, X., Dixon, P., Peng, L. & Rimmer, M. 2016, 'Rural led exchange rate appreciation in China', China Economic Review (Amsterdam).
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Dixon, P.B., Menzies, G.D. & Rimmer, M.T. 2015, 'Removing 'Red Tape' Regulation in an Uncertain Environment', CIFR Paper, no. 067.
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The following report is the result of collaborative research between UTS and the Centre of Policy Studies, funded by the Centre for International Finance and Regulation (CIFR) in order to assist the Murray Financial System Inquiry (FSI). Initial discussions with both CIFR and the FSI defined the scope of enquiry so that we report on any general guiding principles for the removal of low quality regulation ('red tape') rather than on a set of specific cost-benefit analyses for the removal of specific regulations. The main benefit of removing regulation is the freeing up of resources. The main cost of removing regulation is the increased chance of financial recession. The effects of removing regulation on the character of any recession – for example its depth or duration – are not quantified, since we have eschewed specific measure cost-benefit analyses. This implies we understate the costs of removing regulation. We model a reduction in red tape as a 1% productivity increase in the financial sector and then conduct two sets of simulations to show the macroeconomic effects. The first set is under ABS conventions in which financial services are sold to households and as an input into current production. In the second set we adjust the ABS conventions to recognize the role of financial services in investment. In both sets of simulations a 1% improvement in productivity in financial services translates into a 0.05% productivity increase for the economy. Reducing the cost of financial services stimulates employment in the short run, especially under ABS conventions. It stimulates investment throughout the simulation period, especially under our adjusted convention. The long run effect on GDP of a 1% improvement in productivity in financial services is around 0.070% under our adjusted conventions, and around 0.06% under the ABS conventions, giving an average of 0.065%. Therefore, for a given recession that costs 10% of GDP, a reduction of regulation costs e...
Menzies, G. 2015, 'Stop the Boats: Do the Ends Justify the Means?', Economic Papers: A journal of applied economics and policy, vol. 34, no. 4, pp. 229-242.
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Menzies, G.D. & Zizzo, D. 2012, 'Monetary policy and inferential expectations of exchange rates', Journal of International Financial Markets, Institutions and Money, vol. 22, no. 2, pp. 359-380.
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We present a macroeconomic market experiment to isolate the impact of monetary shocks on the exchange rate, as an alternative to SVAR identification. In a non-stochastic treatment, covered interest rate parity holds and predicted exchange rates are tracked well. In a stochastic treatment, we model expectations using a Neyman-Pearson hypothesis test (inferential expectations) and find evidence of belief conservatism and uncovered interest rate parity failure. The market environment magnifies belief conservatism, which is opposite to the standard claim that markets tend to eliminate individual choice anomalies
Lyons, B., Menzies, G.D. & Zizzo, D. 2012, 'Conflicting evidence and decisions by agency professionals: An experimental test in the context of merger regulation', Theory and Decision, vol. 73, no. 3, pp. 465-499.
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Many important regulatory decisions are taken by professionals employing limited and conflicting evidence. We conduct an experiment in a merger regulation setting, identifying the role of different standards of proof, volumes of evidence, cost of error and professional or lay decision making. The experiment was conducted on current practitioners from 11 different jurisdictions, in addition to student subjects. Legal standards of proof significantly affect decisions. There are specific differences because of professional judgment, including in how error costs and volume of evidence are taken into account. We narrow the range of explanations for why professional decision making matters.
Menzies, G.D. & Hay, D. 2012, 'Self and neighbours', Economic Record, vol. 88, no. s1, pp. 137-148.
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The paper notes the findings of a panel survey in the USA to motivate a framework to model altruistic behaviour by members of faith communities. We posit an internal tension within agents to be oriented to self or to neighbours. We model this by a mixed motive valuation function which values both classic utility (based on own consumption), and generosity to neighbours. In the short run, the value assigned to generosity by an agent is fixed; in the long run, it is determined by the agent's understanding and practice of 'love for neighbour' (as discussed in McCloskey, 2006), which, according to the Christian world view, is influenced by the agent's spiritual state.
Menzies, G.D., Bird, R., Dixon, P. & Rimmer, M. 2011, 'Asset Price Regulators, Unite: You have the Macroeconomy to Win and the Microeconomic Losses are Small', Economic Record, vol. 87, no. 278, pp. 449-464.
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The global financial crisis (GFC) has rekindled debate about the desirability of governmental interference in asset markets either through the operation of policy levers, or through the chosen institutional setup. In this article, we quantify economic costs because of mispricing of real assets in the USAGE model of the USA. The microeconomic costs of misallocated capital are small. The model suggests that regulators (or central banks) who risk mispricing by influencing asset prices do so without incurring large economic costs.
Bird, R., Menzies, G.D., Dixon, P. & Rimmer, M. 2011, 'The economic costs of US stock mispricing', Journal of Policy Modeling, vol. 33, no. 4, pp. 552-567.
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The USAGE model for the United States is used to quantify economic costs due to stock mispricing, made operational by shocking Tobins q. The simulations quantify a potentially large impact even in the most favorable environment, where export demand holds up, and, the dollar is pro-cyclical. A two-year investment boom in two sectors increases consumption by a Net Present Value (NPV) amount of nearly one per cent, due to a positive investment externality onto the US terms of trade. If the investment is wasted, however, the consumption loss is nearly one-half of a per cent. A 5-year `capital strike across the whole economy subsequent to the boom mimicking financial distress from a burst bubble shaves around 10 per cent off consumption. Given these significant costs associated with boom and bust equity markets, we consider some, policy options that might result in greater stability in these markets.
Henckel, T., Menzies, G.D., Prokhovnik, N. & Zizzo, D. 2011, 'Barro-Gordon revisited: Reputational equilibria with inferential expectations', Economics Letters, vol. 112, no. 2, pp. 144-147.
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We incorporate inferential expectations into the BarroGordon model (Barro and Gordon, 1983a) of time inconsistency and consider reputational equilibria. The range of sustainable equilibria shrinks as the private sector becomes more belief-conservative.
Bush, S.A., Menzies, G.D. & Thorp, S.J. 2009, 'An array of online teaching tools', Teaching Statistics, vol. 31, no. 1, pp. 17-20.
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The Internet offers a huge array of teaching resources for statistics. Here we present a selection of engaging Web-based tools, ranging from class surveys to individual simulation experiments.
Menzies, G.D. 2009, 'Emotion and empathy as pedagogical tools: Instructive activities in teaching international and developmental economics', Australasian Journal of Economics Education, vol. 6, no. 1, pp. 38-51.
Empathy and emotion are normally viewed with scepticism in economics, partly due to the positive/normative distinction. However, harnessed appropriately, empathy and emotion can be powerful pedagogical aids. This paper describes two teaching activities where students learn about poverty, equity, welfare and rights-to-pollute in affective ways. This approach enables them to develop a deeper understanding and to think more critically about subject conten
Menzies, G.D. & Zizzo, D. 2009, 'Inferential expectations', B. E. Journal of Macroeconomics, vol. 9, no. 1, pp. 1-25.
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We propose that the formation of beliefs be treated as statistical hypothesis tests, and label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, we assume agents switch to the rational expectation. Thus, if the test size is unity, agents hold rational expectations. We solve a Dornbusch-style model of exchange rates under rational expectations and inferential expectations. Under the latter we prove that the regression tests of Uncovered Interest Parity and the rational expectations version of the term structure display a downward bias. The model also explains delayed overshooting and sharp changes in exchange rates.
Menzies, G.D. & Zizzo, D.J. 2009, 'Uncertainty, Choices and Prices in a Market for Lotteries'.
We consider an experimental setting where agents receive one stylized piece of information at a time about the value of a lottery. We find that Knightian uncertainty about the prior distribution of true lottery values does not hamper decision making by agents and markets. On a mean squared error criterion, Bayesian updating is closer than simple averaging in predicting market prices and individual bids and offers, even in treatments with uncertainty where Bayesian updating should not be feasible given the limited information set. Bayesian updating also outperforms adaptive expectations in relation to market prices.
Menzies, G.D. & Vines, D. 2008, 'The transfer problem and real exchange rate overshooting in financial crises: The role of the debt servicing multiplier', Review of International Economics, vol. 16, no. 4, pp. 709-727.
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We develop a real model of exchange rate overshooting due to a debt servicing multiplier. Borrowers of foreign capital are bound by noncontingent contracts to pay the world rate of return following an adverse shock. This is onerous, since the marginal product of capital is less than the world rate of return and the shock causes some capital to become extra-marginal. If the resultant debt servicing shortfall is met by taxes on workers, this reduces their demand for nontradable goods, which feeds back onto their wage, reducing their demand for nontradable goods, etc. In the short run, when extra-marginal projects are "stuck" in the economy, the real exchange rate can overshoot. This mechanism may help to explain overshooting of exchange rates in the 1997 Asian financial crisis
Menzies, G.D. 2008, 'Can HIPCs Use Hyper-incentives?', Review of Applied Economics, vol. 4, no. 1-2, pp. 113-124.
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Menzies, G.D. 2008, 'Teaching Hypothesis Testing: What is Doubted, What is Tested?', Australasian Journal of Economics Education, vol. 5, no. 1 and 2, pp. 1-9.
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Null hypotheses in undergraduate econometrics courses are usually framed in terms of parameter values or distributions. But relatively simple techniques can also test for violations of good scientific practice. This is neatly illustrated for students by a reinterpretation of an influential paper by Sir Ronald Fisher, where a rejection region is formed on the left tail of a 2 distribution. This idea is extended to situations where dubious models fit 'too well'. In these cases, a high R2 may be taken as evidence that a non-random subset of regressions is being 'adversely selected' for publication.
Menzies, G.D. & Hay, D. 2008, 'Economics and the marriage wars', Faith and Economics, vol. 51, no. Spring, pp. 1-29.
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We critique the economic analysis of marriage and divorce descending from Becker (1981): we call this the "economic" approach. Marriage is based on the "productive" gains available from specialization in market production and household production, and on the production of children. ln the more recent development of the theory, the husband and wife bargain over the gains. This analysis contrasts with the "covenant" view of marriage which is based on the Judea-Christian tradition. The ethical focus of the covenant view is self-giving love, which is not dependent on economic efficiency. We suggest that the changing attitudes to marriage and divorce in the West may reflect "motivation crowding out," as the economic approach erodes the values underpinning the covenant view. Marriage, like the monarchy over the last three centuries, remains popular in many quarters. But the mere existence of an institution can mask its wholesale transformation.
Menzies, G.D. & Zizzo, D.J. 2008, 'Do Only Economists Rely on Statistical Significance?'.
Economists, like other scientists, routinely rely on classical statistical inference to form expectations on whether a claim holds in academic research, with significance levels such as 0.05 being assigned special meaning. We present experimental evidence suggesting that most people are also belief conservative and that, if the degree of belief conservatism is restricted to a single value, the resulting hypothesis testing occurs using a 0.05 significance level for those subjects who are not best described by rational expectations.
Docherty, P.T., Tse, H.P., Forman, S.R. & Menzies, G.D. 2006, 'Reducing the expectations gap: Facilitating improved student writing in an intermediate macroeconomics course (F&E paper #150)'.
Menzies, G.D. 2006, 'Debt and aid, war and peace: Policy tradeoffs in conflict-affected countries', Review of Applied Economics, vol. 20, no. 268, pp. 169-179.
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A creditor can balance debt recovery and humanitarian goals within an optimal contract framework. The approach ties together two strands of literature that assume either creditor self-interest (Krugman 1988) or benevolence (Addison and Murshed 2003). A reservation utility for the debtor serves as a metric for creditor benevolence. The optimal hyper-incentive contract recognizes that the attainment of health, education, peace and the appeasement of foreign creditors may be conflicting goals. Forgiving debt to motivate paying creditors may therefore have the unintended effect of reducing effort devoted to winning a civil war. For a given reservation utility for the debtor, aid directly targeted towards ending a civil war is a substitute for debt forgiveness.
Menzies, G.D. 2005, 'Who's afraid of the Marshall-Lerner condition?', Economic Papers, vol. 24, no. 4, pp. 309-315.
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Dvornak, N., Kohler, M. & Menzies, G.D. 2005, 'Australia's medium-run exchange rate: A macroeconomic balance approach', The Economic Record, vol. 81, no. 253, pp. 101-112.
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The determinants of Australia's exchange rate based on the internal-external balance approach introduced by Williamson (1983) were analysed. Internal balance implies that the economy is operating at supply potential with no inflationary pressures. Extern
Menzies, G.D. 2004, 'First-best debt relief', Economics Letters, vol. 82, no. 3, pp. 301-306.
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Menzies, G.D. 2004, 'Money to burn, or melt? a cost-benefit analysis of Australian polymer banknotes.', The North American Journal of Economics and Finance, vol. 15, no. 3, pp. 355-368.
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Menzies, G.D. 2000, 'The economics and ethics of international debt relief', UK Association of Christian Economists Journal, vol. 27, no. March, pp. 1-16.
Menzies, G.D. 1999, 'Alice in academia', Economic Papers, vol. 18, no. 2, pp. 95-95.
Menzies, G.D. 1998, 'The influence of supply shocks on Australian inflation', Journal of Social and Management Sciences, vol. 27, no. 2, pp. 151-170.
Gruen, D. & Menzies, G.D. 1995, 'Forward discount bias: Is it near-rationality in the foreign exchange market?', Economic Record, vol. 71, no. 2, pp. 157-166.
Tarditi, A. & Menzies, G.D. 1995, 'Monthly movements in the Australian dollar and real short-term interest differentials: An application of the Kalman filter', Journal of Foreign Exchange and International Finance, vol. 8, no. 4, pp. 396-417.
Menzies, G.D. 1995, 'Can altruism aid the jobs compact?', Economic Papers, vol. 14, no. 2, pp. 11-16.
Menzies, G.D. 1994, 'A comment on recent surveys of Australian exporters', Economic Papers, vol. 13, no. 1, pp. 122-124.
Menzies, G.D. 1994, 'Explaining the timing of Australia's manufactured export boom', The Australian Economic Review, vol. 27, no. 4, pp. 72-87.

Other

Menzies, G. 2014, 'Regulatory Independence – It's not Just about Institutionss'.
Financial regulators perform inter alia a quality control function, as they search for recession-generating flaws in the financial system. Some groupings of regulations operate more or less independently to other groupings, as is the case when different agents – not necessarily different institutions – examining the same regulatory issues or monitor the same behaviours independently. We refer to these clusters as Independent Dimensions of Regulation (IDRs). They may appear inefficient if the same issue is explored repeatedly. However, statistical independence in this context can rapidly reduce the probability of crises. If quality control regulations are dependent, policymakers should make them more independent.
Brennan, G., Menzies, G. & Munger, M. 2014, 'A Brief History of Equality'.
We explicate an iron law of intergenerational transmission of income dispersion. The same mechanism that limited income disparities, as population and prosperity increased through much of the early industrial revolution, will now sharply exaggerate inequality. The reason is that, for the first time in human history, richer parents are having fewer surviving children. Moreover, the effects of this fact in a setting like the current, where average family size is small and economic growth is strong, are quite marked. The social contract implicit in free market liberalism may require ongoing policy intervention to lean against the scolding winds of inequality.
Henckel, T., Menzies, G. & Zizzo, D.J. 2013, 'The Great Recession and the Two Dimensions of European Central Bank Credibility'.
A puzzle from the Great Recession is an apparent mismatch between a fall in the persistence of European inflation rates, and the increased variability of expert forecasts of inflation. We explain this puzzle and show how country specific beliefs about inflation are still quite close to the European Central Bank target of 2% (what we call official target credibility) but the degree of anchoring to this target has gone down, implying an erosion of what we call anchoring credibility. A decline in anchoring credibility can explain increased forecast variance independently of any changes in inflation persistence, contrary to standard time series models.
Menzies, G. & Xiao, X. 2012, 'Non-traded Factor Appreciation in China'.
The departure of a factor in excess supply in the non-traded sector leads to a real appreciation, in a setup that combines the canonical Lewis Model (Lewis, 1954, and Fei and Ranis, 1961, 1964) with a Balassa-Samuelson traded/non-traded dichotomy (Obstfeld and Rogoff, 1996). China is a potential candidate for non-traded factor appreciation, since it has not completed its structural transformation. A transfer of rural labor to urban areas will appreciate the real exchange rate.
Henckel, T., Menzies, G.D. & Zizzo, D. 2010, 'Inferential expectations and the missing middle of price changes', Applied Econometrics and Policy Working Paper, University of East Anglia.
Working paper number: 8 <p>Absract: Microeconomic evidence suggests price changes are either very small, or large. The theory of inferential expectations predicts this phenomena if agents use a low test size, reflecting a reluctance to change their minds on the basis of evidence.
Lyons, B., Menzies, G.D. & Zizzo, D. 2010, 'Professional interpretation of the standard of proof: An experimental test on merger regulation', Working Paper Series, Centre for Competition Policy, University of East Anglia.
Working Paper Number: 10-2
Henckel, T., Menzies, G.D. & Zizzo, D. 2010, 'Threshold pricing in a noisy world', Working Paper Series, Centre for Applied Macroeconomic Analysis, Australian National University.
Abstract: We propose that the formation of beliefs be treated as statistical hypothesis tests, and label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, we assume agents switch to the rational expectation. We build a state dependent Phillips curve, and show that adjustments to equilibria may be contaminated by noise adverse selection, where agents in possession of extreme information are the first to adjust to changed economic circumstances. This approach is able to replicate recent micro-level evidence on firms pricing behavior and sheds light onto the dynamics of disaggregated prices.
Henckel, T., Menzies, G.D., Prokhovnik, N. & Zizzo, D. 2010, 'Barro-Gordon revisited: Reputational equilibria with inferential expectations', Working Paper Series, School of Economics, University of East Anglia.
Abstract: We incorporate inferential expectations into the Barro-Gordon model (1983a) of time inconsistency and consider reputational equilibria. The range of sustainable equilibria shrinks as the private sector becomes more belief-conservative.
Henckel, T., Menzies, G.D., Prokhovnik, N. & Zizzo, D. 2010, 'Barro-Gordon revisited: Reputational equilibria with inferential expectations', Working Paper Series, Centre for Applied Macroeconomic Analysis, Australian National University.
Working Paper Number: 2010-29 <p>Abstract: We incorporate inferential expectations into the Barro-Gordon model (1983a) of time inconsistency and consider reputational equilibria. The range of sustainable equilibria shrinks as the private sector becomes more belief-conservative.
Menzies, G.D., Professor Ronald Geoffrey Bird, R., Dixon, P. & Rimmer, M. 2010, 'The economic costs of US stock mispricing', Working Paper Series, Centre of Policy Studies/IMPACT Centre, Monash University.
Woring Paper Number: G-204 <p>Abstract: The USAGE model for the United States is used to quantify economic costs due to stock mispricing, made operational by shocking Tobin's q. The simulations quantify a potentially large impact even in the most favorable environment, where export demand holds up, and, the dollar is pro cyclical. A two year investment boom in two sectors increases consumption by a Net Present Value (NPV) amount of nearly one per cent, due to a positive investment externality onto the US terms of trade. If the investment is wasted, however, the consumption loss is nearly one half of a per cent. A 5 year 'capital strike' across the whole economy subsequent to the boom - mimicking financial distress from a burst bubble - shaves around 10 per cent off consumption.
Bird, R., Menzies, G., Dixon, P. & Rimmer, M. 2010, 'Asset Price Regulators Unite: You Have Macroeconomic Stability to Win and the Microeconomic Losses are Second-order'.
The Global Financial Crisis (GFC) has rekindled debate about the desirability of governmental interference in asset markets &#8211; either through the operation of policy levers, or, through the chosen institutional setup. In this paper we quantify economic costs due to mispricing of real assets in the USAGE model of the United States. The microeconomic costs of misallocated capital are second-order small. The model suggests that regulators (or central banks) who restrain the volatility of asset prices do so without incurring large economic costs.
Bird, R., Menzies, G., Dixon, P. & Rimmer, M. 2009, 'The Aggregate Economic Costs of US Stock Mispricing'.
Stock mispricing can lead to misallocation and wastage of capital both inter-temporally and across sectors. The USAGE model for the United States is used to quantify economic costs under a number of mispricing scenarios, made operational by shocking Tobin's q. A two-year Communications and Technology investment boom increases consumption by a Net Present Value (NPV) amount of nearly one per cent, partly due to a positive investment externality onto the US terms of trade. If the investment is wasted, however, this gain in consumption is more than offset, leading to a loss of nearly one-half of a per cent. A protracted 'capital strike' across the whole economy subsequent to the boom &#8211; mimicking financial distress from a burst bubble &#8211; shaves around 7 per cent off consumption if the strike lasts for 3 years, and 10 per cent if it lasts for 5 years.
Menzies, G.D., Pratt, J., Thorp, S.J. & Docherty, P.T. 2008, 'Piloting a Peer Feedback Program in the Faculty of Business at UTS (154)', Working Paper Series.
This paper outlines the trial and development of a peer review program for teaching improvement in the Faculty of Business at the University of Technology, Sydney (UTS). It first explores some of the key issues in the purpose and design of peer review schemes. It agrees with a strong theme in the peer review literature that peer review is most effective when used for quality enhancement rather than quality assurance in the sense used by Lomas and Nicholls (2005). It also recognises the possibility of resistance from academic staff to the idea of peer review and scepticism about its usefulness. A methodology for the conduct of a pilot peer review scheme is outlined drawing on the work of Bingham and Ottewill (2001) and Puget and Schubert (2008) in which peer review is voluntary, confidential and reciprocal involving a mutual arrangement with a trusted colleague to observe each other&acirc;s teaching and to offer private constructive feedback within agreed parameters. The experience of participants in the pilot scheme is reported and observations made about both the process of peer review itself and of attempting to establish a peer review program in a Faculty not previously used to such methods of professional and educational development.
Menzies, G.D. & Zizzo, D. 2008, 'News and expectations in financial markets: An experimental study', Working Paper Series, Centre for Applied Macroeconomic Analysis, Australian Nationl University.
Working Paper Number: 34/2008
Menzies, G.D. & Zizzo, D. 2007, 'Exchange rate markets and conservative inferential expectations', Working Paper Series, Centre for Applied Macroeconomic Analysis, Australian National University.
Working Paper Number: 2007-02 <p>Abstract: We present a macroeconomic market experiment on the financial determination of exchange rates, and consider whether the assumption that belief formation be treated as a classical hypothesis test, which we label inferential expectations, can explain the effect of uncertainty on exchange rates. In a non-stochastic environment, exchange rates closely follow standard predictions. In our stochastic environment, inferential expectations with a low test size alpha (conservative inferential expectations) predict exchange rates better than rational expectations in ten sessions out of twelve. Belief conservatism appears magnified rather than diminished at the market level, and the degree of belief conservatism seems connected to the failure of uncovered interest rate parity regressions.
Kirsanova, T., Menzies, G.D. & Vines, D. 2007, 'Stiglitz versus the IMF on the Asian debt crisis: An intertemporal model with real exchange rate overshooting', Discussion Paper Series, Centre for Economic Policy Research.
Discussion Paper Number: 6318 <P>Abstract: This paper develops a real model of financial crisis, and uses it to elucidate the controversy between Joe Stiglitz and the IMF concerning the Asian financial crisis. Borrowers of foreign capital are bound by lending contracts to pay the world rate of return on their borrowing, following an adverse shock; by assumption, they do not default. This is onerous, since the shock makes the marginal product of capital fall to less than the world rate of return, and creates a debt overhang on which interest must be paid. The country faces a choice. It could choose to pay these extra interest obligations on its debt overhang -- a transfer -- in every period, raise taxes in order to meet these obligations, and thereby gradually reduce capital to its new lower level, at which point there would no longer be a debt overhang. We describe this as the `IMF strategy'. Alternatively the country could choose the `Stiglitz strategy': it could immediately borrow internationally the sum of all the future interest obligations on its debt overhang, perhaps with the assistance of the IMF. It would need to raise taxes in order to meet the interest costs on that extra borrowing. But the fiscal cost of doing this would be finite and the fiscal costs would be equally spread across time. The short run tax burden would thus be smaller. We show that balance sheet effects mean that the real exchange rate can greatly overshoot in the IMF strategy, whereas it need not overshoot in the Stiglitz strategy. That will lessen the `crisis' aspects of the short run responses to the shock.
Menzies, G.D. & Zizzo, D. 2005, 'Inferential expectations (QFRC paper #159)'.
ISSN 1441-8010 www.business.uts.edu.au/qfrc/research/research_papers/rp159.pdf
Menzies, G.D. & Zizzo, D. 2005, 'Inferential expectations', Working Paper Series, Centre for Applied Macroeconomic Analysis, Australian National University.
Working Paper Number: 2005-12 <p>Abstract: We propose that the formation of beliefs be treated as statistical hypothesis tests, and we label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, agents are assumed to switch to the rational expectation. Rational expectations are shown to be a special (limiting) case of inferential expectations, with the test size alpha becoming a metric for rationality. We present the results of an experiment that supports inferential expectations. When inferential expectations are built into a Dornbusch-style model of the exchange rate, regression tests of Uncovered Interest Parity and the rational expectations version of the term structure both display downward bias in the slope coefficient.
Menzies, G.D. & Zizzo, D. 2004, 'Inferential expectations.'.
Dvornak, N., Kohler, M. & Menzies, G.D. 2003, 'Australia's medium-run exchange rate: A macroeconomic balance approach', Research Discussion Paper Series, Reserve Bank of Australia.
Research Discussion Paper: 2003-03 <p>Abstract: We analyse the determinants of Australia's exchange rate in terms of the approach introduced by Williamson (1983), based on the simultaneous attainment of internal and external balance. Internal balance implies that the economy is operating at its supply potential with no inflationary pressures. External balance is characterised as the sustainable net flow of resources (corresponding to a current account to GDP ratio) between countries when they are in internal balance. The approach provides estimates of the medium-term exchange rate associated with a given current account position, although the estimates are highly sensitive to variations in key parameters.
Vines, D. & Menzies, G.D. 2002, 'Debt overhang and real exchange rate overshooting in the Asian crisis', Discussion Paper Series, Department of Economics, Oxford University.
Discussion Paper Number: 122 <p>Abstract: We develop a stylized real model of the Asian crisis where an adverse extenal shock can lead to real exchange rate overshooting. Domestic borrowers of foreign capital are bound by debt contracts even when the capital is unable to earn the world rate of return. Following an adverse shock, the requirement to honour these debt contracts leads to a debt overhang. In the long run, when capital becomes mobile, extra-marginal projects are shut down as capital departs, and the real exchange rate falls by more than the terms of trade shock. In the short run, the real exchange rate is partly determined by demand conditions by means of what we call the wage and overhang multipliers. For reasonable production and consumption parameters, the short run real exchange rate - driven by the wage and overhang multipliers - overshoots its long run value.
Menzies, G.D. 2000, 'Debt forgiveness: The case for hyper-incentive contracts', Discussion Paper Series, Department of Economics, Oxford University.
Discussion Paper Number: 37 <p>Abstract: We review two proposals for debt forgiveness; the Highly Indebted Poor Country Initiative (HIPC) and the Jubilee 2000 Coalition Initiative (J2K). We then consider the workhorse model of debt forgiveness (Krugman 1988). We show that the workhorse model solution is a sub-optimal contract, where the incentive parameter is set without regard to the cost of effort. A fully-optimal debt-overhang contract is derived, with an incentive parameter greater than the marginal social benefit of extra effort. The so-named Hyper-Incentive Contract eliminates the effects of moral hazard arising from hidden effort, and provides a fuller rationale for case-by-case debt-overhang contracts.
Edey, M., Kerrison, E. & Menzies, G.D. 1987, 'Transmission of external shocks in the RBII model', Research Discussion Paper Series, Reserve Bank of Australia.
Research paper number: 8710 <p>Abstract: The paper gives an overview of recent work in the development of the RBII macroeconomic model, focussing on adjustments designed to reflect the post-deregulation financial environment. Changes to the RBII model have been made in two main areas. First, a clearing market for short-term funds has been introduced, making interest rates much more responsive to open market operations. Secondly, a number of adjustments have been made so as to model debt accumulation (both domestic and external) in more detail. The properties of the revised model are illustrated in simulations of a variety of domestic and external shocks. These simulations also serve to illustrate the implications of alternative assumptions about the short term operating objectives of monetary policy.