1. Towards a general model of economic trade, investment and growth Terry Maidment Economists Conference 2003 ANU Globalisation and Distribution MON. 13:45 - 15:15 MCC T6

2. Introduction 4 This paper covers topics related to economic welfare from trade and growth of relevance to:  Australia,  the developing economies of ASEAN  and APEC as well as the leading industrial economies of the  United States and  Japan.

3. Story Line 4 Commodity price shocks applied to a GTAP simulation would quantify the effects of the recent changes relative to total global trade flows 4 Theory highlights the role of interest rates, exchange rates and inflation in long run ge models 4 The empirical model is a Keynesian demand model of consumption, IS and LM for 16 economies

4. Main points 4 Microeconomic foundations of investment include human capital in endogenous growth models (in particular see Beaudry and Green 2003) 4 At the 2003 UNSW econometric conference there were two papers on the short term official interest rate the policy instrument. 4 In addition, a paper on FDI observed that FDI should be placed in the context of total capital movements and complete capital markets. 4 An empirical result that we state is that the real exchange rate Granger causes the real interest rate but not the reverse causality in the case of Japan.

5. Finer points 4 Special note on the EU 4 Policy of SLP for developing economies 4 Stabilisation:Argentina and Brazil 4 Liberalisation:APEC, WTO, China 4 Privatisation:EU and Budget deficit, the Maastrict Treaty

6. Regional focus and theory 4 CLMV (Cambodia, Laos, Myanmar, Vietnam) 4 APEC and MFN 4 ASEAN 4 GE Theory

7. Input Output Statistics and CGE analysis 4 It has been well known for some time that the statical Leontief system is the simplest form of Walrasian general equilibrium, it provides disaggregation within a macro model and in the simplest Leontief system, the linear programming solution is well defined. – Dorfman, Samuelson and Solow, DOSSOL, Chapter 9, The Statical Leontief System, pp 204- 264.

8. General equilibrium assumptions

9. Sensitivity analysis and model parameters 4 Kim and Pagan 1997 have described calibration of CGE models as flowing from Johansen 1960. 4 Johansen's linearised solution of equilibrium values presupposes the existence of a benchmark data set and also an evaluation of a stochastic equilibrium solution of a potential empirically identified economy. 4 The solution however is not necessarily observable in a real economy. 4 Sensitivity to parameter values and CGE model reliability are analysed in Pagan and Shannon, 1987 and Horridge, 1986. 4 Hanslow and Pearson 1989 demonstrated the utility of TABLO in GEMPACK for performing local sensitivity analysis on any set of model parameters. – Kim and Pagan 1997, page 364.

10. International Markets 4 Commodity Markets 4 Total trade and price effects 4 Capital flows 4 Trade agreements 4 Regional issues 4 Financial market dynamics 4 Australia 4 Exchange rate

11. Real effective exchange rate Japan 1980 to 2003

12. Real interest rate for Japan

13. Real interest rate for Japan and the United States

14. Euro Real effective exchange rate 1980Q1 to 2003Q1

15. Euro nominal Govt bond yield 1994Q1 to 2003Q1

16. Real EURO IR 1998Q1 to 2003Q1

17. Long bond rate global markets Recovery of Japan’s financial markets

18. Australia’s Long run real exchange rate

19. Australia’s Short run real exchange rate

20. 10 year bonds rising at last in Australia and Japan

21. ASX Dividend yields

22. Real and nominal ASX

23. ASX Annual and real returns

24. Returns on the ASX since 1995 Monthly and annual

25. Financial sectors ASX levels: Recent patterns

26. Industrial ASX sectors: Recent patterns

27. Financial sectors ASX accumulation index levels

28. Industrial ASX sectors accumulation index: Recent patterns

29. Expected inflation and interest rate differentials

30. Australia’s environment 4 The key industry sector in the current business cycle seems to be IT related and its characteristics have been well analysed. 4 Trade linkages 4 Financial markets 4 Regional trade and growth 4 Commodity Markets

31. Australia’s Commodity prices since 1993 with and without oil

32. Cumulative changes in Australia’s export commodities

33. Australia’s export prices per cent monthly changes

34. GTAP IRAQ price shock 4 The GTAP simulation for the recent IRAQ, SARS shocks is based on a 7% commodity price decline. 4 GTAP version 4 with ten regions and ten industry sectors.

35. GTAP results in percentage chages

36. Keynesian 3-equation model

37. Australia Consumption

38. Australia’s Investment equation

39. Australia’s money demand equation - Interest rate formation

40. Summary and conclusion 4 Australia’s growth is related to world stability and equilibrium growth rates 4 Japans markets indicate a return to stability and growth 4 Trade liberalisation, competitition policy and microeconomic reforms focussing on efficiency and productivity offer key returns for welfare gains