Topic 13: Australia after the Boom (Dog Days)

Question 1

What is the setting of Garnaut’s Dog Days?

Answer 1

• We are in the third stage of a boom where investment falls.
• These projects will employ few works in their steady state production, so won’t contribute much to growth.
• Increased production of iron ore and natural gas, as demand falls, will decrease export prices.

Question 2

What are the primary shocks in Garnaut’s Dog Days?

Answer 2

• Deteriorating terms of trade as commodity prices fall (NM shifts right)
• Investment decline (decrease in r_C^e)
• US monetary policy tightens, raising bond yeilds in Au (KA right from r* inc)

Question 3

What are the secondary shocks in Garnaut’s Dog Days?

Answer 3

• Pessimism (decreased Y_N^e, Δe_R^e and π^e)
• US recovery that raises export demand to US & China, partially reversing one of the primary shocks, so NM left from (Y* inc).

Question 4

What are the problems resulting from the Gaurnot shocks?

Answer 4

Monetary contraction could hurt industries sensitive to the short rate (housing) and or cause a financial meltdown if we have a bubble.

Pc will inflate considerably

Decrease in investment will hurt longrun.

Question 5

What is Garnaut’s solutions?

Answer 5

Another round of micro reforms.

Question 6

Outline Garnaut’s micro reforms

Answer 6

• Not in mining, productivity here will increase naturally following the end of the boom.
• Trade distortions and rents: protection remains a source of inefficiency at home, particuarly in oligopolistic industries in manufacturing & services.
• Network services:
  
  • Electricity impared by enviromental & reliability regulation
  • Water heavily regulated or supplied by state-owned systems, with water intensive industries being very protected
  • Financial services & insurance have large barriers to entry with high rents
  • Transport has many public-private partnetships where states underwrite private returns linked to margins over P_C. As this inflates relative to PY these will become costly.