Quantifying “Dog Days”

Abstract

In Dog Days, Garnaut (2013) portrays Australia's immediate future as characterised by the end of the mining investment boom, declining terms of trade, a decline in labour input per head of population, slow multifactor productivity growth, fiscal consolidation and rising world interest rates. We quantify the consequences of these developments using a detailed general equilibrium model. Consistent with Garnaut, we find that wage and demand restraint will be required to steer Australia through the difficult period ahead. Public understanding of Dog Days will help move expectations to match current unfavourable conditions and thereby promote an orderly adjustment with minimum damage to employment and standards of living.

‘Dog Days’ Full Employment without Depreciation: Can It Be Done?

“…Forecasts of these variables from government agencies, including the Bureau of Resource and Energy Economics (Barber et al 2014;BREE 2014), the Australian Treasury (Commonwealth of Australia 2010Australia , 2014Bullen, Kouparitsas and Krolikowski 2014), the Australian Bureau of Statistics (ABS 2013) and the Productivity Commission (Parham 2012), were built into the VIC-UNI model by Dixon et al (2014aDixon et al ( , 2014b. The model was used to evaluate the requirements for adjustment to these conditions without an increase in unemployment, a circumstance denoted as 'orderly adjustment' (OA).…”

“…A DA scenario reported in Dixon et al (2014aDixon et al ( , 2014b explores the consequences of maintaining the real consumer wage at its 2014 level for 2 years, along with a lack of restraint in real aggregate consumption. Real devaluation is delayed and the unemployment rate increases by almost 1 percentage point over 2 years.…”

“…The OA simulation from Dixon et al (2014aDixon et al ( , 2014b) is treated as the baseline. In the OA simulation, to maintain unemployment at its 2014 level, the downturn in economic conditions embodied in Dog Days is manifest in a fall in real wages.…”

“…Modelling of this scenario was presented to the July meeting of the Melbourne Economic Forum (Dixon et al 2014a(Dixon et al , 2014b. We identified a smooth adjustment path to changed circumstances, which minimised the increase in unemployment and reduction in living standards, and also an alternative path of disorderly adjustment (DA), characterised by economic volatility and unemployment.…”

“…We identified a smooth adjustment path to changed circumstances, which minimised the increase in unemployment and reduction in living standards, and also an alternative path of disorderly adjustment (DA), characterised by economic volatility and unemployment. The original DA scenario reported in Dixon et al (2014aDixon et al ( , 2014b was predicated on inflexibility in wages and consumer behaviour. This article explores an alternative DA scenario in which the exchange rate is slow to adjust.…”