Dr Gordon Menzies joined UTS as a Senior Lecturer in Economics in 2003 and has since become an Associate Professor. 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).
Over 2007 until 2016 he was the Deputy Director of the UTS Paul Woolley Centre for Capital Market Dysfunctionality. He has managed a large project on financial sector modelling, contributed to the recent Murray Review of the financial system, and taken a key role in the Political Economy of Financial Markets group at Oxford University. 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”.
Can supervise: YES
Macroeconomics, International Economics, Econometrics, Economic Modelling, Monetary Economics, Development Economics.
Macroeconomics, International Economics, Econometrics, Statistics, Monetary Economics, Development Economics.
Docherty, P, Bird, R, Henckel, T & Menzies, GD 2016, 'Australian Prudential Regulation Before and After the Global Financial Crisis', CIFR Paper, no. 110, pp. 2-58.View/Download from: UTS OPUS or Publisher's site
This paper reviews the nature of Australian bank prudential regulation before and after the
Global Financial Crisis (GFC). It begins by providing a detailed conceptual framework for
understanding the functions of banks and deposit-takers, the theory of what can go wrong
with the operation of these institutions, and the logic of prudential regulation. It then traces
developments in Australian prudential regulation from the introduction of the formal
capital-based framework in the 1980s to the implementation of the Basel III regime after
the GFC. The paper concludes that the introduction of the Financial Claims Scheme was
clear a change compared with pre-GFC arrangements and one to be welcomed but one that
constituted a clarification and formalisation of an existing perception suggested by the
depositor protection provisions of the Banking Act rather than a fundamental change. The
paper also concludes that the introduction of the Basel III liquidity regime did constitute a
more fundamental modification. Requiring banks to hold enough liquidity to manage net
cash outflows over a thirty day period in stressed conditions, engenders confidence in
deposit-takers and provides a backstop to the effectiveness of capital measures designed to
reduce the likelihood of financial instability. Changes to authorised deposit-taking
institution (ADI) capital regulation that lie at the core of the Basel III regime also represent
positive and desirable developments in the Australian context. In particular, enhancing the
quality of ADI capital to ensure that it provides a cushion of instruments genuinely
available to absorb losses in the loan portfolio and related exposures, and ensuring that
securitisation arrangements do not leave residual credit exposures unaccounted for in the
provision of this protective cushion, enhance the safety of Australian ADIs. That these
represent fundamental changes in philosophy compared to pre-GFC arrangements is less
clear. Their importance is unquest...
© 2016 Economic Society of Australia The costs of removing red tape include a lower chance of detecting recession-generating flaws in the financial system. What we call independent dimensions of regulation (IDRs) operate more or less independently from other groupings. If an IDR's optimality is unknown, it may be risky to remove. Uncertainty thus implies that (some) red tape – a small amount of overregulation – is justified, in contrast to the Brainard principle that uncertainty dictates less policy activism. The long-run Gross Domestic Product (GDP) benefit of a 1 per cent improvement in financial services productivity is 0.06 per cent in our computable general equilibrium model. These relatively modest gains reinforce our conclusion.
Menzies, GD, Xiao, X, Dixon, P, Peng, L & Rimmer, M 2016, 'Rural led exchange rate appreciation in China', China Economic Review, vol. 16, no. 3, pp. 374-379.View/Download from: UTS OPUS or Publisher's site
Lyons, B, Menzies, GD & 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.View/Download from: UTS OPUS or Publisher's site
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.
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, GD & 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.View/Download from: UTS OPUS or Publisher's site
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
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, GD, Prokhovnik, N & Zizzo, D 2011, 'Barro-Gordon revisited: Reputational equilibria with inferential expectations', Economics Letters, vol. 112, no. 2, pp. 144-147.View/Download from: UTS OPUS or Publisher's site
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.
Menzies, GD, 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.View/Download from: UTS OPUS or Publisher's site
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.
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
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.
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.
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, GD & 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.View/Download from: UTS OPUS or Publisher's site
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
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.
Dvornak, N, Kohler, M & Menzies, GD 2005, 'Australia's medium-run exchange rate: A macroeconomic balance approach', The Economic Record, vol. 81, no. 253, pp. 101-112.View/Download from: UTS OPUS or Publisher's site
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, GD 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.View/Download from: UTS OPUS or Publisher's site
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, GD 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, GD 1995, 'Forward discount bias: Is it near-rationality in the foreign exchange market?', Economic Record, vol. 71, no. 2, pp. 157-166.
Menzies, GD 1995, 'Can altruism aid the jobs compact?', Economic Papers, vol. 14, no. 2, pp. 11-16.
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, GD 1994, 'A comment on recent surveys of Australian exporters', Economic Papers, vol. 13, no. 1, pp. 122-124.
Menzies, GD 1994, 'Explaining the timing of Australia's manufactured export boom', The Australian Economic Review, vol. 27, no. 4, pp. 72-87.
Hay, D & Menzies, G 2015, 'Is the model of human nature in economics fundamentally flawed? Seeking a better model of economic behavior' in Theology and Economics: A Christian Vision of the Common Good, pp. 183-198.View/Download from: Publisher's site
Hay, D & Menzies, GD 2015, 'Is the Model of Human Nature in Economics Fundamentally Flawed? Seeking a Better Model of Human Behaviour' in Kidwell, J & Doherty, S (eds), Theology and Economics: A Christian Vision of the Common Good, Palgrave Macmillan, New York, pp. 183-198.View/Download from: UTS OPUS
Menzies, G.D. & Zizzo, D. 2008, 'Rational expectations' in Darity, W. (ed), International Encyclopedia of the Social Sciences, Macmillan, USA, pp. 51-53.
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., Henckel, T. & Zizzo, D. 2010, 'Threshold pricing in a noisy world', Seminar Presentation, Australian National University, Canberra, 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.
Menzies, G.D. 2009, 'Pricing setting under inferential expectations', Conference on Behavioural Macroeconomics: Theory and Policy Implications, Sydney, 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. 2004, 'Inferential expectations', Seminar Presentation, School of Finance and Economics, University of Technology, Sydney, Sydney, Australia.
Menzies, GD & 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.View/Download from: UTS OPUS
Dvornak, N, Kohler, M & Menzies, GD 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, GD 2003, 'First-best debt relief', Seminar Presentation, School of Finance and Economics, University of Technology, Sydney, 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.
Menzies, G 2018, 'A Synthesis of the Lewis Development Model and Neoclassical Trade Models'.
A simplifed Lewis model with evidence-based assumptions treats all rural output as nontraded, and pays rural workers a convex combination of their average and marginal products. Lewis style transition is characterized as an
increase in the weight on marginal product in the determination of the rural wage. This integration with standard trade models underscores the importance of trade for development, and predicts a real exchange rate appreciation for
economies undergoing a Lewis style transition.
Menzies, G, Simpson, T, Hay, D & Vines, D 2018, 'Restoring Trust in Finance: From Principal-Agent to Principled Agent'.
Bonuses in finance represents a bad equilbrium among multiple equilibria. Motivating agents with bonuses can promote untruthfulness, via motivation crowding out, justifying the decision to pay them bonuses. In the equilibrium
that works in other professions, moral norms are upheld enough to not require bonuses. Escaping the bad equilibrium is difficult if banks engage in an 'optimal' amount of deceit (moral optimization). Restoring trust instead requires
that untruthfulness be ruled out a priori (moral prioritization). Reinstating truth telling in finance must contend with a tendency for ethics to be confined to the private domain and motivation crowding out in finance.
Menzies, G, Stavrunova, O & Yerokhin, O 2018, 'The Effects of Birth Order on Adult Outcomes: Evidence from Australia'.
This paper investigates how birth order affects education, labour market outcomes, health, personality traits, in-vivo transfers and inheritance of Australians. We find that later born children have lower educational
attainment, though we cannot find a detrimental effect on health, personality or parental financial transfers. Sibship size is related to inheritance in a way consistent with the financial dilution hypothesis, but its causal effect
cannot be identified with confidence.
Henckel, T, Menzies, G, Moffat, P & Zizzo, DJ 2017, 'Sticky Belief Adjustment: A Double Hurdle Model and Experimental Evidence'.
Given a lack of perfect knowledge about the future, agents need to form expectations about variables a?ecting their decisions. We present an experiment where subjects sequentially receive signals about the true state of the world and need to form beliefs about which one is true, with payo?s related to reported beliefs. We control for risk aversion using the O?erman et al. (2009) technique. Against the baseline of Bayesian updating, we test for belief adjustment under-reaction and over-reaction and model the decision making process of the agent as a double hurdle model where agents ?rst decide whether to adjust their beliefs and, if so, then decide by how much. We ?nd evidence for sticky belief adjustment. This is due to a combination of: random belief adjustment; state-dependent belief adjustment, with many subjects requiring considerable evidence to change their beliefs; and Quasi-Bayesian belief adjustment, with insu?cient belief adjustment when a belief change does occur.
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.
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.
Henckel, T, Menzies, G & Zizzo, DJ 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 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.
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.
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
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 otherâs 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.
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 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. 2007, 'Exchange rate markets and conservative inferential expectations', Working Paper Series, Centre for Applied Macroeconomic Analysis, Australian National University.
Working Paper Number: 2007-02 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.
Menzies, G.D. & Zizzo, D. 2005, 'Inferential expectations', Working Paper Series, Centre for Applied Macroeconomic Analysis, Australian National University.
Working Paper Number: 2005-12 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. 2005, 'Inferential expectations (QFRC paper #159)'.
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 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.
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 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.