Glenn Otto’s Web Page

Associate Professor

School of Economics

University of New South Wales

Sydney 2052

Australia

UNSW Website http://www.economics.unsw.edu.au/GlennOtto

Email: g.otto@unsw.edu.au

This website contains my publications, current research papers, relevant programs and data.

Recent Work

RBA Preferences

What do the RBA’s Forecasts Imply About its Preferences over Inflation and Output Volatility? (with Graham Voss) December 2010. Since the RBA can potentially influence future outcomes for inflation and output through its choice of cash rate target; we examine whether the RBA’s forecasts reveal useful information about its trade-off between inflation and output volatility. Our results suggest that the RBA targets a linear combination of deviations of inflation around target and output growth around potential growth – where the weight given to output growth deviations is about one-half that given to inflation deviations. If we interpret this weight as the ratio of a central bank’s (relative) preference for output volatility and the slope parameter of the Phillips curve; for standard values of the latter parameter we find the RBA – while not a strict inflation targeter – gives significantly lower weight (one-third or less) to minimizing deviations in the output gap, than it does to minimizing deviations of inflation around target.

Housing Supply Elasticity

Supply Elasticity in the Sydney Housing Market (with Emily Gitelman) December 2010. We present estimates of the supply elasticity for residential property in metropolitan Sydney over the

period 1991-2006. Our results suggest that supply is inelastic – less than unity – for all types of housing; although the supply elasticity is relatively larger for strata properties (apartments and flats) than for non-strata properties (separate and semi-detached houses, terraces and town-houses). We also find evidence of a significant fall in supply elasticity between 1991-1996 and 2001-2006, suggesting that housing supply in Sydney has become less elastic over time.

Monetary Policy Targeting Rules

Strict and Flexible Inflation Forecast Targets: An Empirical Investigation (with Graham Voss) Revised Version, April 2009. Targeting rules are an alternative to the Taylor rule for thinking about how central banks should set monetary policy. Svensson (2003) and Woodford (2007) have argued that central banks should implement monetary policy via forecast targeting rules. Unlike the Taylor rule, there is relatively little empirical evidence on whether any forecast targeting rule is consistent with the data. We test some simple targeting rules implied by the basic New Keynesian model for Australia, Canada and the United States. The data suggest that all three countries are flexible inflation targeters, but the relative weight given to output variations is not very large. Slides for presentation at HKIMR.

Consumption and Wealth

The Response of Australian Consumption to Housing Wealth (with Lance Fisher and Graham Voss) Revised Version, May 2009. Large variations in house prices can lead to significant changes in the level of household wealth. Using Lettau and Ludvigson’s (2004) cointegration approach, we investigate the response of non-housing consumption to permanent and transitory changes in financial and non-financial (housing) wealth in Australia since the mid-1970s. The data provide evidence that housing wealth contains a large transitory component, but up to 2004 at least, these transitory changes in wealth are not associated with any significant response in consumption. When post-2004 data are included in the estimation, there is some evidence that household consumption responds to recent transitory rises in wealth and labor income. However this finding needs to be weighed against weaker evidence of a cointegrating relationship for consumption, income and wealth. Data File.

Published Papers

House Prices

Prices, Rents and Rational Speculative Bubbles in the Sydney Housing Market (with Eden Hatzvi).The Economic Record, 2008, 84(267), 405-420. link. Data and Program Files. This paper offers an asset pricing explanation for the sharp rise in the price-rent ratio for residential property in Sydney that occurred in the late 1990s – early 2000s. A full set of empirical results, referred to in the published paper (but not reported) can be found in the October 2007 version. The main points of the paper can be found in Slides for ACE 07. An even earlier version of the paper contains additional results – Old Version (June 2007).

“The Growth of House Prices in Australian Capital Cities: What Do Economic Fundamentals Explain?” Australian Economic Review, 2007, 40(3), 225-38. Published version is available online. Paper contains empirical estimates of the effect of mortgage rates on the growth rate of house prices in Australian cities. Data File (Excel). An earlier version of the paper is available as a Centre for Applied Economic Research (CAER) Working Paper 2006(10).

International Macroeconomics

Discussion of “International Business Cycle Co-Movements Through Time” by D Andrews and M Kohler in The Changing Nature of the Business Cycle, (ed) C. Kent and D. Norman, Proceedings of a Conference 11-12 July 2005, RBA, 220-224. link.

“Persistence of Output Fluctuations under Different Exchange Rate Regimes,” (with Mark Crosby), Asian Economic Journal, 2003, 17(3), 281-296. Data File. An earlier version can be found at HKIMR WP 07/2001.

“Can an Intertemporal Model Explain Australia's Current Account Deficit?” Australian Economic Review, 2003, 36(3), 350-359. Data and Program Files.

“The Effect of Terms of Trade Shocks on the Trade Balance: There is a Harberger Laursen-Metzler Effect?” Journal of International Money and Finance, 2003, 22(2), 155-184. Data File.

“An Australian-New Zealand Currency Union?” (with Mark Crosby), in G. de Brouwer, (ed.), Financial Markets and Policies in East Asia, Routledge, 2002, 325-335.

“Understanding OECD Output Correlations,” (with Graham Voss and Luke Willard), RDP 2001-05, Reserve Bank of Australia, 2001. link.

“Growth and the Real Exchange Rate – Evidence from 11 Countries,” (with Mark Crosby), HKIMR WP 8/2001. link.

“Optimal Consumption, External Debt and the Real Interest Rate,” (with Graham Voss), Journal of Macroeconomics, 1995, 17(3), 471-494.

“Consumption Smoothing and the Current Account,” (with Ross Milbourne), Australian Economic Papers, December 1992, 369-384.

“Testing a Present-value Model of the Current Account: Evidence from United States and Canada,” Journal of International Money and Finance, 1992 11(5), 414-430.

Public Capital

“Public Investment and Economic Growth,” (with Ross Milbourne and Graham Voss), Applied Economics, 2003, 35, 527-540.

“Is Public Capital Provision Efficient?” (with Graham Voss), Journal of Monetary Economics, August 1998, 42, 47-66.

“Public Capital and Private Sector Production,” (with Graham Voss), Southern Economic Journal, January 1996, 62(3), 723-738.

“Public Capital and Private Sector Productivity: A Review of the Empirical Evidence,” (with Graham Voss), The Economic and Labour Relations Review, 1995, 6(1), 52-70.

“Public Infrastructure and Private Production,” (with Graham Voss), Agenda, 1995 2(2), 181-189.

“Public Capital and Private Sector Productivity,” (with Graham Voss), The Economic Record, June 1994, 209, Vol. 70, 121-132.

Macroeconomics

“Central Bank Operating Procedures: How the RBA Achieves its Target for the Cash Rate,” Australian Economic Review, 2007, 40(2), 216-224.

“Money Demand in General Equilibrium Endogenous Growth: Estimating the Role of a Variable Interest Rate Elasticity,” (with Max Gillman), Quantitative and Qualitative Analysis in Social Sciences, 2007, 1(1), 1-25. link

“Inflation and the Capital Stock,” (with Mark Crosby), Journal of Money, Credit and Banking, May 2000, 32(2), 236-253.

“The Solow Residual for Australia: Technology Shocks or Factor Hoarding?” Economic Inquiry, January 1999, 17(1), 136-153.

“Productivity Growth and Economic Policy in Australia,” Research Paper No. 19, Department of the Parliamentary Library, 1997. link

“Australian Business Cycle Facts,” (with Lance Fisher and Graham Voss), Australian Economic Papers, December 1996, 202-222.

“Buffer-Stock Money: Interpreting Short-Run Dynamics Using Long-Run Restrictions: Comment,” (with Ross Milbourne), Journal of Money, Credit and Banking, May 1996, 28(2), 272-278.

“Real Business Cycles: An Introduction,” (with Mark Crosby), Australian Economic Review, 1995, 3^rd Quarter, 53-70.

“Seasonal Unit Root Tests on Canadian Macroeconomic Time Series,” (with Tony Wirjanto), Economics Letters, 1990, 34, 117-120.

“Estimates of Canadian GDP, Monthly, 1962 to 1985”, (with Richard Guay, Ross Milbourne and Gregor Smith), L’Actualite Economique, 1990, 66(1), 14-30.