Over the past two decades, “globalisation” has become the main theme in the global economy. Three main themes have emerged. First, there has been an increase in economic integration as trade and financial linkages across countries have multiplied. Second, emerging economies have become increasingly important to global growth. Third, emerging economies such as China and India have continued to grow, despite the slowdown in advanced economies since 2008.
In the recent financial crisis of 2008, it became apparent that a crisis in the small United States (US) subprime market can lead to a big crisis within the financial market. Emerging economies continued to grow rather rapidly even though major advanced economies were undergoing significant contractions. The divergence in growth between the emerging economies and the major advanced economies added to the ongoing debate about whether business cycles in emerging economies have “decoupled” from those of the advanced economies. Many economies, particularly the US, implemented huge fiscal stimulus packages to help boost their economies. This resulted in the debate about the nature of government fiscal policies and its effectiveness in stimulating the economies.
These developments highlight the current gaps in the existing literature. First, in analysing the impact of monetary and fiscal policies on the economy, the existing empirical literature typically focuses either on monetary or fiscal policy and not the combination. The transmission mechanism within an economy may be different when both fiscal and monetary variables are included in the system. Second, the emergence of other global economic players such as China and India implies that the transmission mechanisms of the international business cycle to other economies, particularly the advanced economies, may have changed.
The aim of my thesis is to examine the transmission mechanism of economic shocks, in view of the current gaps in the existing literature.
The first working paper analyses the importance of monetary and fiscal policy shocks in explaining US macroeconomic fluctuations using a Factor Augmented Vector Autoregression (FAVAR) framework. I’ve recently presented this paper at the 25th PhD Conference in Economics and Business, hosted by UWA in 2012. Thank you to the really constructive comments I’ve received, not just from my discussant, but also from the floor.
Conference paper is available here. There are still substantial revisions to be made to the paper. But, I see no harm in putting up the conference paper version, since it is readily available from UWA’s website.