This thesis examines whether a broad range of macroeconomic time series for Australia lead or lag the cycle, or whether they aid in predicting aggregate fluctuations. Postwar Australian data is utilized in conjunction with the band-pass filter approach developed by Baxter and King (1995) and incorporating Granger causality tests. There is a review of the literature that has developed relating to understanding business cycle fluctuations. The econometric methodology employed is detailed and

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... asted to alternative techniques. The estimation results are considered to ascertain whether it reflects current theoretical interpretation of the behaviour of the variable. The wage, prices and government consumption series are not consistent with theoretical interpretation. The estimation results indicate the importance of a number of key variables in determining the level of economic activity, including employment data, short-term interest rates, and actual and expected inflation. The results are compared to recent international empirical studies employing varied detrending techniques, the results reported are not consistent for wages series which is countercyclical. The results are interpreted to provide a useful predictor of the level of economic activity thereby serving as a useful tool for policymakers. Table of Contents Chapter 1 Chapter 4 DISCUSSION OF ESTIMATION RESULTS 4.1 Overview 4.2 The Data and Summary Statistics 4.2 (i) The Data 4.2 (ii) Comovements Quantified 4.2 (iii) Standard Deviation of Cross-Correlations 4.2 (iv) Lead-Lag Relationships between Series and Output 4.2 (v) Cyclical Components 4.3 Discussion of Results for Selected Post-War Australian Data 4.3 (i) National Accounts Components 4.3 (ii) Aggregate Employment, Productivity and Sectoral Employment 4.3 (iii) Prices and Wages 4.3 (iv) Interest Rates and Share Prices 4.3 (v) Money 4.3 (vi) Balance of Payments and External Finance 4.3 (vii) Miscellaneous Indicators 4.3 (viii) International Output 4.4 Estimation Results Chapter 2 Literature Review 6 2.1 OVERVIEW For well over a century business cycles have run an unceasing round. Thy have persisted through vast economic and social changes; thy have withstood countless experiments in industry, agriculture, banking, industrial relations, and public poliy; thy have confoundedforecasters without number, belied repeated prophecies of a 'new era ofprosperity ' and outlived repeatedforeboding of 'chronic depression ' Bums, A.F (1947; 27) This chapter reviews the theoretical and empirical literature relating to understanding the nature of business cycle fluctuations. The literature is itself subject to a wave-like movement, peaking during and after periods of turbulence and depression, waning in periods of substantial stability and continuing growth.1 The literature review is separated into theoretical and empirical analysis, as much of the development has occurred in this manner. Firstly, I examine the historical theories, which were largely endogenous, deterministic, multicausal and descriptive. Then, progress through to the contemporary theories, which are mainly exogenous, stochastic, monocausal or limited to very few shocks, and based on small formal models. The prevailing view currently is that the economy is perturbed by disturbances of various types and sizes at more or less random intervals, and that those disturbances then propagate through the economy. Secondly, I examine two contemporary theories: the Real Business Cycles (RBC) and New Keynesian theories. These theories differ in their hypotheses concerning shocks and propagation mechanisms. The analysis will focus on the implications of these theories for an Chapter 2 Uterature Review Chapter 2 literature Review 9 10 Both Romer (1993) and Mankiw (1989) provided a detailed analysis of the contrast between RBC and New-Keynesian views on business cycle fluctuations. Chapter 2 Literature Review 12 11 This table was formulated with reference to Zamowitz (1992), Romer (1996) and the authors listed above. Chapter 2 Literature Review 13 2.2 (ii) Real Business Cycle Kydland and Prescott (1982) initiated a research agenda, which become known as Real Business Cycle (RBC) theory.12 This led business cycle theorists to focus attention on technology (or productivity) shocks as the underlying source of business cycle fluctuations. This literature was an outgrowth of the equilibrium strategy for business cycle analysis that was initiated by Lucas (1972 Lucas ( ,1973 Lucas ( ,1975) ) and extended by Barro (1976) . The RBC models places much more emphasis than the previous equilibrium-approach literature, on mechanisms involving cycle propagation, that is, the spreading over time of the effects of shocks. More recently, work in this area has emphasized changes in government purchases.13 Both technological and government purchases shocks represent real -as opposed to monetary, or nominal -disturbances. Technology shocks change the amount produced from a given quantity of inputs. Government purchases shocks change the quantity of goods available to the private economy for a given level of production. The RBC theory assumes that prices are fully flexible, even in the short run, as a result it obeys the classical dichotomy. According to this theory, nominal variables, such as the money supply and the price level, do not influence real variables, such as output and employment in the long run. To explain fluctuations in real variables, this theory emphasizes real changes in the economy, such as changes in production technologies, which can alter the 12 Other papers, which developed on this model, include