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Setting interest rates higher than macroeconomic conditions would warrant due to concerns about financial instability is called ‘leaning against the wind’. Many recent papers have attempted to quantify and evaluate the effects of this policy. This paper summarises this research and applies the approach to Australia. The papers we survey see the benefit of leaning against the wind as avoiding financial crises, such as those that affected Australia in 1990 or other countries in 2008. Most of the international research finds that interest rates have too small an effect on the probability of a crisis for this benefit to be worth higher unemployment. Using Australian data, we find similar results. We estimate the costs of leaning against the wind to be three to eight times larger than the benefit of avoiding financial crises. However, research has not yet quantified the increased resilience of household balance sheets, which may be an extra benefit of leaning against the wind.

Low interest rates in the United States have recently been accompanied by large fiscal stimulus. However, previous discussions of monetary policy did not anticipate this fiscal activism, leading to over-estimates of the costs of the zero lower bound and, hence, of the appropriate inflation target. To rectify this, I include counter-cyclical fiscal policy within a large-scale model of the US economy and find that it stabilizes activity at low interest rates. If fiscal policy behaves as it has recently, then the inflation target can remain near its pre-crisis level, despite increased volatility of macroeconomic shocks.

Since November 2007, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve has regularly published participants’ qualitative assessments of the uncertainty attending their individual forecasts of real activity and inflation, expressed relative to that seen on average in the past. The benchmarks used for these historical comparisons are the average root mean squared forecast errors (RMSEs) made by various private and government forecasters over the past twenty years. This paper documents how these benchmarks are constructed and discusses some of their properties. We draw several conclusions. First, if past performance is a reasonable guide to future accuracy, considerable uncertainty surrounds all macroeconomic projections, including those of FOMC participants. Second, different forecasters have similar accuracy. Third, estimates of uncertainty about future real activity and interest rates are now considerably greater than prior to the financial crisis; in contrast, estimates of inflation accuracy have changed little. Finally, fan charts-constructed as plus-or-minus one RMSE intervals about the median FOMC forecast, under the expectation that future projection errors will be unbiased and symmetrically distributed, and that the intervals cover about 70 percent of possible outcomes-provide a reasonable approximation to future uncertainty, especially when viewed in conjunction with the FOMC's qualitative assessments. That said, an assumption of symmetry about the interest rate outlook is problematic if the expected path of the federal funds rate is expected to remain low.

Several researchers have recently documented large reductions in economic volatility. But a more important question may be whether the economy has become more predictable. Using forecasts from the Federal Reserve Greenbooks, I find that inflation and output have become more predictable, though the results for output are somewhat mixed. The reductions in unpredictability (if any) are significantly smaller than reductions in volatility. Associated with this, the predictable component of fluctuations in output and inflation has virtually disappeared.

Participants in meetings of the Federal Open Market Committee (FOMC) regularly produce individual projections of real activity and inflation that are published in summary form. These summaries indicate participants' views about the most likely course for the macroeconomy but, by themselves, are not enough to gauge the full range of possible outcomes -- that is, the uncertainty surrounding the outlook. To this end, FOMC participants will now provide qualitative assessments of how they view the degree of current uncertainty relative to that which prevailed on average in the past. This paper discusses a method for gauging the average magnitude of historical uncertainty using information on the predictive accuracy of a number of private and government forecasters. The results suggest that, if past performance is a reasonable guide to the accuracy of future forecasts, considerable uncertainty surrounds all macroeconomic projections, including those of FOMC participants.

Several researchers have recently documented a large reduction in output volatility. In contrast, this paper examines whether output has become more predictable. Using forecasts from the Federal Reserve Greenbooks, I find the evidence is somewhat mixed. Output seems to have become more predictable at short horizons, but not necessarily at longer horizons. The reduction in unpredictability is much less than the reduction in volatility. Associated with this, recent forecasts had little predictive power.

We find that Okun's law provides a simple and accurate means of understanding and predicting changes in the unemployment rate in Australia. Okun's law also implies a rate of output growth consistent with stable unemployment, called the growth of potential output. Our estimates of potential output growth are imprecise and fluctuate over time. A recent estimate is a bit below 3 per cent a year, with a +/− one standard error band covering the range 2¼ to 3¾ per cent. This is a percentage point or two below estimates from before the mid 1990s.

This paper examines whether it is more expensive to own a house or to rent. The paper assesses houses as ‘overvalued’ if home buyers pay too much, in the sense that they would be better off renting than buying. This involves comparing the financial cost of renting a home with the cost of owning a similar dwelling, where the latter depends on the purchase price, interest rates, repairs, council rates and so on. The paper also briefly examines non-financial costs but find these are small, on average. This paper finds if real house prices grow at their historical average pace, then owning a home is about as expensive as renting. If prices grow more slowly, as some forecasters predict, the framework used in this paper suggests that the average home buyer would be financially better off renting. House prices are decomposed into contributions from rents, interest rates and expected capital gains, which may help policymakers in the detection of housing bubbles. Recent data do not show signs of a bubble.

This paper estimates the effects of the mining boom in Australia, using a large-scale structural macroeconometric model, AUS-M. We estimate that the mining boom boosted real per capita household disposable income by 13 per cent by 2013. The boom has contributed to a large appreciation of the Australian dollar that has weighed on other industries exposed to trade, such as manufacturing and agriculture. However, because manufacturing benefits from higher demand for inputs to mining, the deindustrialisation that sometimes accompanies resource booms – the so-called ‘Dutch disease’ – has not been strong.

This article presents estimates of the effects of the mining boom using a macroeconometric model of the Australian economy. The mining boom is estimated to have boosted real per capita household disposable income by 13 per cent over the decade to 2013. The boom contributed to a large appreciation of the Australian dollar that has weighed on other industries exposed to trade, such as manufacturing and agriculture.

We use past forecast errors to construct confidence intervals and other estimates of uncertainty around the Reserve Bank of Australia's forecasts of key macroeconomic variables. Our estimates suggest that uncertainty about forecasts is high. We find that the RBA's forecasts have substantial explanatory power for the inflation rate but not for GDP growth.

This chapter compares and contrasts international experience with respect to higher education financing. The size and payment forms of tuition, and the different types and levels of public sector support, are illustrated for a large number of countries. A major aspect of the discussion concerns the conceptual bases and the costs and benefits of the two different instruments of government intervention for student financing: guaranteed bank loans, and income contingent loans. It is argued that income contingent loans have a number of advantages over government guaranteed bank loans, and this seems to be increasingly recognised with respect to international adoption of the former. However, to be efficacious income contingent loan systems require sophisticated institutional and administrative repayment collection arrangements.

The average educational attainment of US students is weak by international comparison. For example, mean results of PISA test scores are below the OECD average. This is despite substantial resources devoted to the schooling system. One partial explanation for this is that academic standards, curriculum and examinations are not sufficiently challenging in most US states. In 2001, Congress enacted the No Child Left Behind Act (NCLB) to raise achievement levels, especially of certain groups that perform badly. The Act requires states to establish clear content standards as to what students should know, to regularly assess performance and to set thresholds for adequate yearly progress; it also requires schools where students are failing to meet such thresholds to improve or close, while enhancing options for parents of children in such schools to place their children elsewhere. The law appears to be well conceived, addressing key problems in a sensible manner. Preliminary indications are consistent with it raising school performance and closing achievement gaps. The NCLB legislation should therefore be reauthorised. Moreover, the NCLB framework of standards, assessment and accountability should be extended through upper secondary education. That said, there are a number of areas in which improvements could be made. Though the federal government cannot set standards, it could strengthen incentives for more states to make their standards more challenging. As well, the federal government should help states and districts to better test student achievement and assess progress.

America’s higher education system is among the best in the world. Nevertheless, there is scope for improvement. In particular, there appear to be substantial financial barriers to higher education despite large government expenditures aimed at promoting access. Policy makers have proposed addressing these barriers by increasing student grants. However, grants are costly, inefficient, inequitable and ineffective. Income tax concessions and state government subsidies suffer from similar problems. In contrast, international best practice seems to be converging on student loans with repayments that vary according to income. Income-contingent loans facilitate access to college at low fiscal cost and without the inefficiency and inequities that accompany grants, subsidies or tax concessions. At the same time, they do not discourage risk-averse or uninformed students in the way that conventional loans do. The United States has an income-contingent loan programme that should be expanded. While the design of repayments could be improved, the main problem with this programme is that lending limits are too low. Higher limits, especially for unsubsidised direct loans, would benefit students and promote access at little cost to the government. Were a good system of loans in place, then less cost-effective means of promoting access, such as grants and tax concessions, should be cut back.

This paper discusses recent developments and policy issues relating to financial markets in Iceland. Overall, the sector is thriving, both relative to history and to conditions in other countries. This bodes well not only for those directly involved in the industry but for the country as a whole, as financial development is an important source of economic growth. Recently concerns have been expressed about the stability of the financial system; however the guarded assessment...

Participants in meetings of the Federal Open Market Committee (FOMC) regularly produce individual projections of real activity and inflation that are published in summary form. These summaries indicate participants' views about the most likely course for the macroeconomy but, by themselves, are not enough to gauge the full range of possible outcomes -- that is, the uncertainty surrounding the outlook. To this end, FOMC participants will now provide qualitative assessments of how they view the degree of current uncertainty relative to that which prevailed on average in the past. This paper discusses a method for gauging the average magnitude of historical uncertainty using information on the predictive accuracy of a number of private and government forecasters. The results suggest that, if past performance is a reasonable guide to the accuracy of future forecasts, considerable uncertainty surrounds all macroeconomic projections, including those of FOMC participants.

A high minimum wage (relative to average wages) raises nominal wage growth and hence inflation. This effect can be offset by extra unemployment; so the minimum wage increases the Non-Accelerating Inflation Rate of Unemployment or NAIRU. This effect is clearly discernible and robust to variations in model specification and sample period. It is consistent with international comparisons and the behavior of prices. I estimate that the reduction in the relative level of the minimum wage over the last two decades accounts for a reduction in the NAIRU of about 1 1/2 percentage points. It can also account for the substantial reduction in the NAIRU in the United States relative to continental Europe.