I run several Bayesian macroeconomic models of the Australian economy. They fit the data to the model structure and estimate how much each variable is contributing to the key unobservables – the natural rate of unemployment and the potential growth rate. What follows is what those models are currently telling me.
But first, let's quickly recap on the RBA's policy rate, the current state of Australian inflation, and the current unemployment rate.
The NAIRU – the non-accelerating inflation rate of unemployment – is back at the centre of the Australian monetary policy debate. With the RBA hiking in February and the next meeting in mid-March, the question isn't really about the direction of policy anymore. It's about pace. Should the RBA hike again in March, or wait for the Q1 quarterly data and (depending on that data) act in May?
The answer depends almost entirely on where you think the NAIRU sits.
Bayesian approach to estimating NAIRU, potential output, and the output gap
