Abstract
This paper uses Reiterative Truncated Projected Least Squares to estimate the effects of US monetary and fiscal policy on Australia using quarterly data between 1960 and 2022. When Australia had a fixed exchange rate (1960–1983), both US fiscal and monetary policies were positively correlated with Australia’s GDP, which fits the predictions of a small-country IS/LM/BP model with relatively immobile capital. When Australia had a flexible exchange rate (1984–2022), US fiscal policy was positively correlated with Australia’s GDP, but US monetary policy was negatively correlated with Australia’s GDP, which fits the predictions of a large-country IS/LM/BP model.
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