Melbourne Business School News New research could help economic policy and climate change

New research could help economic policy and climate change

A Melbourne Business School expert is working on two new research projects that could improve decision-making when it comes to monetary policy as well as climate change.

people infront of reserve bank of australia

Assistant Professor of Econometrics and Business Statistics Wenying Yao and her colleagues were recently awarded more than $600,000 in Australian Research Council grants to undertake two new major research projects utilising large panel data models to improve decision-making and policy evaluations.

Assistant Professor Yao hopes the research will lead to a better understanding of major social issues, such as the future effects of climate change and predicting the outcomes of monetary policy decisions, including interest rate rises.

More effective monetary policy decisions

The first grant of $312,355 is for a project that aims to find a way to make more effective monetary policy decisions, being run in collaboration with Monash University.  

The project will look at the term structure of interest rates, with the goal of helping policy makers in major economic regions like Australia, Europe and the US achieve desired economic outcomes through better-informed decisions. 

"Traditionally we have used the cash rate as a single measure of monetary policy, as this is what the reserve bank controls directly," Assistant Professor Yao says.

"However, during the pandemic, the cash rate sat at zero per cent for so long that it became more and more difficult to rely on it as an accurate source."

The team are therefore hoping to use high frequency data to create an accurate model of the yield curve, the structure that depicts interest rates at different points of maturity, as another measure of monetary policy.  

"Even though the cash rate was zero for so long, we were still seeing interest rates at longer maturities above zero. We could see that these longer-term interest rates provided a more flexible ways of measuring the monetary policy."

The researchers hope to use high frequency data now available on government bonds to develop an effective way of estimating the yield curve at any point in time. 

"Being able to estimate the entire yield curve will mean we can better understand not only the policy, but what effects these policies might have," Assistant Professor Yao says.

That could lead to a better understanding of whether interest rate rises achieve their desired outcome of reducing future inflation.

A more accurate way to model trends

The second grant for $313,000 is for a project also being run with Monash University, which aims to use panel data to create a more accurate way to model trends both locally and globally.

"We have a lot of different forms of data that we use," Assistant Professor Yao says.

"Cross-sectional data is information collected from a random group at a single point in time, for example, recording the GDP of numerous countries on a particular date. 

"Time-series data on the other hand involves observing the same data over time so we can map trends or changes. So, mapping the GDP of a single country over 20 years."

Panel data combines both. 

"For instance, we can look at the GDP of a country over time, but then compare it to other countries to see if they are experiencing the same trends," she says.

"We will then be able to use this data to look across subjects to see what commonalities may have affected the data at various points."

The researchers believe that panel data will enable them to build better models and capture trends – and that their insights could have several potential applications. 

"One application may be using it to better model climate change," Assistant Professor Yao says. 

"We can look at the effects of climate change on an individual country over the years, but we know that there are global effects too, like rising sea waters. 

"Or the concept of financial contagion. How does a crisis in one country affect others?"

The research will focus first on data from OECD member countries, which is already readily available, before moving onto others.

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