The Formation of Producers' Price Expectations in Australia*

This paper investigates the formation of price expectations by Australian manufacturing firms. It is shown that the reported expectations are generally consistent with the hypothesis that they are derived as conditional forecasts from the model used by firms in determining their actual price change behaviour. Tests are then undertaken to see whether the expectations are unbiased and efficient forecasts, the cross-section results indicating generally that they are neither, and hence not rational. Alternative time-series tests of the unbiasedness and efficiency hypothesis, however, suggest that neither hypothesis can be rejected, implying rationality.     

Rational Expectations and the Defris-Williams Inflationary Expectations Series*

This paper evaluates the Defris-Williams inflationary expectations series as a measure of rational expectations for the period 1973(1) to 1980(2). The results show that the series violates the rationality criterion, being an inefficient and biased predictor of inflation. By constructing an ‘information-augmented’ D-W series, the quantitative importance of omitted information available to consumers at the time of making their forecasts is isolated. The key omitted economic variables are found to be lagged monetary growth and unemployment or an indexation dummy which explains 70 percent of the forecast error of the D-W series. These results suggest that a theoretically constructed expectations series may prove to be a superior measure of market expectations of inflation in Australia.     

Alternative Measures of Australian Consumer Inflationary Expectations: Their Relation to Attitudes and Prices

This article was written by Dr L. V. Defris, Lecturer in Economics at Deakin University. It was originally part of a broader joint study of consumer inflationary expectations, with R. A. Williams. The author is greatly indebted to Professor Williams for discussion and development of the analysis.     

The Expectations Theory of the Term Structure of Interest Rates in Australia*

The aim of this paper is to test the expectations theory of the term structure of interest rates in the Australian market for short-term financial assets. The paper finds that the joint hypothesis of the expectations theory and zero (or a constant risk premium) cannot be rejected in the period since the introduction of the tender system for sale of government securities in 1979. The floating of the Australian dollar in 1983 did not alter the findings.     

Inflationary Expectations, Variable Output, and Exchange-Rate Dynamics

This paper develops a model of exchange-rate dynamics characterized by inflationary expectations held with perfect foresight, sticky wages, and sluggish output adjustment. In this framework monetary expansion initially lowers interest rates because of sluggish output and price adjustment but quite surprisingly produces exchange-rate overshooting or undershooting. Moreover, after its initial depreciation in the overshooting case, the domestic currency temporarily appreciates beyond its new long-run equilibrium level. In the undershooting case, the home currency temporarily appreciates away from its new long-run equilibrium level. Finally, the dynamic real exchange rate-real interest rate relationship at times becomes inverse.     

Money Wages, Consumer Prices, and Causality in Australia*

This paper exploits recently developed statistical techniques to examine the causal patterns in lag relationships between changes in wages and consumer prices. The analysis uses quarterly data for selected periods and a total historical sample period 1954-82. Causation has generally been unidirectional from wages to prices. However, for the first half of the 1970s bidirectional causation was detected, though the causation from wages to prices was statistically more significant. Brief consideration is given to some policy implications of the results.     

Regime Switches, Biased Expectations, and the Brazilian Inflationary Experience

The paper analyzes how an error in inflation expectations helped maintain high interest rates in the wake of the major stabilization plans launched in Brazil over the past 18 years. Newly implemented low-inflation measures lacked credibility and forced agents to expect a higher inflation rate than the one effectively observed, creating a wedge between ex-post and ex-ante real interest rates. The results also indicate that past failures have helped undermined the credibility of new measures.     

Price Rigidities, Inflationary Finance and Long-run Growth*

The paper considers a monopolistically competitive intertemporally optimizing monetary economy featuring long-term growth. Inflation is generated through sluggish price-setting and contributes to budgetary finance through seignorage. This setup permits exploration of the interaction between inflation and growth in a tractable way. Superneutrality holds in the long but not the short run. The budget deficit fuels inflation with a hysteresis. Growth and inflation are negatively correlated in the long run, with causality running from the former to the latter, and positively correlated in the short run regardless of the origin of shocks. Price flexibility precipitates adjustment but appears also to destabilize output.     

The Youth Labour Market in Australia*

This paper uses unit record data from the 1985 Australian Longitudinal Survey to review the major features of the youth labour market. It is shown that education plays an important role in determining the incidence of unemployment, wages, hours of work and access to training opportunities. Analyses of labour market dynamics indicates that the probability of leaving unemployment falls off substantially as the duration of the unemployment spell increases. A major conclusion of the paper is that the longer term unemployed appear to be segmented from other labour market participants. An implication of this finding is that there b very little which the longer term unemployed can do at the margin to influence their success other than adopt the most productive method of job search.     

The Importance of Tax Adjustments When Evaluating Wage Expectations*

Using elicited expectations of future gross salaries, we evaluate characteristics causing German students to make larger or smaller estimation errors. While students seem to underestimate actual salaries by 18 percent, we show that these errors are highly attributable to misconceptions of the progressive income tax. Developing a suitable adjustment procedure, we correct students’ estimates and find that errors decline by 12 percentage points. Conducting regression analyses, we reveal strong connections with students’ age, gender, work experience, secondary school track, and knowledge about student loans. These results change notably if not controlling for students’ misconceptions of the tax system.