Research Proposal 2005 Sept - Download (pdf/ slide)

Supervisors: Professor Warwick McKibbin, Dr Renee Fry and Professor Farshid Vahid

Lucas (1997) advocated the understanding of business cycles is the first step towards designing appropriate stabilization policies. My research project set out to further understand the influence of international price shocks, namely world interest rate and terms of trade shocks, in driving a small open economy's business cycles. Previous literature offered mixed, and sometimes, contradicting conclusions. This is largely attributed to the incorrect identification of structural disturbances. In the calibrated DSGE literature, this comes down to the model's inability in matching the historical data and the resultant set of structural disturbances are poorly estimated. In the Structural VAR literature, the use of zero-restrictions almost always contradict with theoretical predictions generated from a large class of DSGE models. The set of potentially invalid identification assumptions may lead to seriously misleading results. My thesis focus on finding ways to reconcile their differences, and demonstrate how one may be able to complement the other in developing further understanding of business cycles for a small open economy.