ECONOMICS

ECOS3021 Business Cycles and Asset Markets

University of Sydney, Semester 1 2021

Assignment

Due date: 5pm Friday 4th June 2021

Assessment weight: This assignment is mandatory, and comprises 25% of the final grade for the class.

Aim: The aim of the assignment is to help you develop your (collaborative) research, analytical and reporting

skills. You will need to find and download data, manage your database, manipulate your data for use in

computations, analyse and produce graphs of the data, and discuss and interpret your results. In addition,

you are expected to apply the concepts and tools studied in class to the assignment problems.

Groups and group membership: You have two options for forming groups:

1. You may form a “group of one” (i.e. an individual assignment).

2. You may form a group of 2 or 3 students

To form a group, see “how do I join a group as a student” on Canvas: https://community.canvaslms.com/

docs/DOC-10516-421264913. The research for the project will have to be broken into categories that can be

assigned to each member. The group must then determine how to bring the separate components together.

Each member of the group owns the final product: no special blame or praise will be accorded to a particular

member. Therefore, you will need to ensure full cooperation by the others since the success of the group will

depend on each individual’s contribution. Free-riders cannot be tolerated! So if anyone refuses to participate,

the group may expel the non-cooperative member. At the end of the assignment, attach a statement signed

by all members (no more than 100 words) describing how each member has contributed to the assignment.

Structure of the assignment:

• Title, author(s), and executive summary (no more than 150 words) on a separate front page

• Primary analysis including tables, figures, and discussion (approximately 1000 words)

• Conclusion summarising your main arguments and results (approximately 300 words)

• A brief description of your data sources and definitions of the variables used, on a separate page

• Bibliography that clearly cites all of your references (e.g. academic articles, reports, news articles)

The report must not exceed 1500 words (excluding the executive summary, data description, and bibliography).

Submission: A representative from your group should upload the final electronic copy via Turnitin on

Canvas (only one report for the group is required) by 5pm on Friday June 4th. The cover page should

include the name and student number of each member of the group. Note that when submitting the

assignment individually, you may receive a warning that it is a group assignment. However, you can safely

ignore the warning. Please note: Your assignment will not be graded if submitted in any other way (i.e. no

email or paper submissions).

Penalty policy: For every day late in submission, 5% will be deducted from the final grade.

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Assignment Topic

How Bad Was the COVID-19 Recession, Really? Evidence From Australian Economic and

Financial Indicators

1 Background for the Assignment

Prior to the global onset of the COVID-19 virus, the Australian macroeconomy was showing signs of weakness.

For example, forecasts provided by the Reserve Bank of Australia suggested a decline in GDP growth through

the end of 2019 and into 2020:

• https://www.rba.gov.au/publications/smp/2019/may/economic-outlook.html

• https://www.rba.gov.au/publications/smp/2019/nov/economic-outlook.html

Economic commentators in newspapers and the media reported on the possibility of Australia entering a

recession for the “first time in 30 years”. For example:

• https://www.abc.net.au/7.30/is-australia-headed-for-recession/11941342

• https://www.ampcapital.com/au/en/insights-hub/articles/2019/october/the-odds-of-australia- going-into-recession

• https://www.abc.net.au/news/2019-12-04/economy-to-continue-teetering-on-the-edge-of-recession/ 11761358

• https://newsroom.unsw.edu.au/news/business-law/australia-recession-gdp-capita-basis-2019- federal-budget-nears

Of course, the COVID-19 Pandemic then surprised the world economy in 2020, which lead to the largest

quarterly GDP decline in Australian economic history:

• https://www.rba.gov.au/publications/smp/2020/nov/economic-outlook.html

2 Aim of the Assignment

Your job is to assess the counter-factual performance of the Australian economy in a world without COVID-

19. That is, what is your best guess of the evolution of Australian macroeconomic variables during 2020 if

COVID-19 had never happened? With this estimate in hand, you can then assess the true impact of COVID:

the effect of the pandemic relative to an economy that may well have been in recession anyway.

3 Approach

3.1 Data

You will use an array of macroeconomic and asset market data to empirically assess macroeconomic conditions

in Australia prior to the onset of the pandemic. You will then use this data to predict whether Australia

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would have been in a recession in 2020 even if the pandemic had never occurred. Finally, you will use the

data and your predictions to assess the size of the gap between actual macroeconomic outcomes in 2020 and

the outcomes you think would have occurred if the pandemic never came about.

In your dataset, you will need to analyse a range of macroeconomic variables such as:

• Real GDP, as a measure of aggregate output

• Price inflation, as a measure of the rate of change in the price level

• Real private consumption

• Real gross fixed investment

• Labour market variables, such as unemployment, employment, wages, and job vacancies

• The trade balance (i.e. exports minus imports)

• Government expenditure

• Market forecasts of or market sentiment concerning future economic activity

In your dataset, you will also need to analyse the following asset market variables such as:

• Interest rates on various government bonds (e.g. the RBA cash rate, 3 month bonds, 1/5/10 year bonds)

• Stock market variables (e.g. stock prices for major companies in Australia)

• House price indexes and number of house sales (e.g. average of house prices/sales in major capital cities in Australia)

• Exchange rates (i.e. the value of the Australian dollar relative to other currencies)

All data should be analysed at a monthly or quarterly frequency, should be seasonally adjusted, and

should cover at least the last 10 years.

3.2 Methods

To analyse the data, you should use both figures/graphs and statistical methods.

Figures and graphs will be useful to show that relationship between different macroeconomic and asset

market variables. You may also wish to create graphs of your “predictions” for the economy through 2020

in the world without COVID-19.

Your statistical methods may include anything covered in this class, such as:

• Means

• Variances/Standard Deviations

• Correlations (e.g. correlation between different variables)

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• Auto-correlations (e.g. correlation of the same variable with itself through time)

• Methods for determining recession dates

You may also consider other simple statistical methods, such as regression analysis.

3.3 Analysis and Discussion

You will need to explain why you are analysing the particular macroeconomic and asset market data that

you present in your assignment. How do these data help with your assessment of the counter-factual state

of the economy in 2020? You will need to explain your view of the relationship between the macroeconomic

and asset market variables, and how you expect that they would have evolved during 2020 absent the global

pandemic.

Explain whether some variables are better predictors of the state of the economy than others. For example,

what is the historical relationship between these variables and the Australian economy? Were some sectors

of the economy (as captured by your chosen data/variables) more important for understanding 2019/2020

than others?

Explain how the concepts you have learned about in class help you with your assessment of the state of

the economy. What is the expected relationship between different macroeconomic variables? What is the

expected relationship between these macroeconomic variables and asset prices/asset markets? Is your data

consistent with the economic relationships discussed in class? Why or why not?

3.4 Relationship to Previous Research

You will need to explain the relationship of your analysis to previous research on this topic. What does

previous research have to say about the evolution of the Australian economy? What factors have driven

Australian business cycles in the past? How important are Australian asset markets (e.g. foreign currency

market, stock market, housing markets) for understanding the evolution of the macroeconomy?

You will need to read academic papers: e.g. economic and finance research published in reputable

academic journals. You will also need to read economic policy reports: e.g. analysis provided by the Reserve

Bank of Australia, The Australian Treasury, the Australian Bureau of Statistics, the International Monetary

Fund, the Organisation for Economic Cooperation and Development, commercial banks (e.g. Westpac,

Commonwealth Bank), or others. Synthesize the relevant information from these articles and reports in a

way that supports your arguments and analysis.

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General Information

Citations: Where appropriate and relevant, the assignment should be carefully referenced using in-text

citations and include a bibliography. You can use any referencing system, but make sure you apply it

consistently. A good way to do this is to use bibliographic software such as Zotero or EndNote. These

applications will not only sure the consistency of your references, they have the added advantage that they

will compile and format your bibliography automatically. Note that a URL is not a reference!

Data to get you started:

• For Australian data, go to the ABS site for Australian and some international data: http://www.abs. gov.au/websitedbs/D3310114.nsf/home/home?opendocument#from-banner=GT

• Also, the Reserve Bank of Australia has good data on Australia and some selected countries http: //www.rba.gov.au/statistics/tables/index.html

• At Fisher Library, you can access the IMF’s IFS database online. Click on http://www.library.usyd. edu.au/databases/

• The DX database, available from the computer labs located in the Business School building.

• IMF World Economic Outlook Database: http://www.imf.org/external/data.htm

References to get you started:

• The Year Ahead, Speech by Phillip Lowe, Governor of the RBA: https://www.rba.gov.au/speeches/ 2020/sp-gov-2020-02-05.html

• Statement on Monetary Policy (RBA): https://www.rba.gov.au/publications/smp/2020/feb/

• Australian economic reports by Westpac https://www.westpac.com.au/about-westpac/media/reports/ australian-economic-reports/

• IMF discussion of the relationship between asset prices and the business cycle: https://www.imf.org/ en/Publications/WEO/Issues/2016/12/31/~/media/Websites/IMF/imported-flagship-issues/external/

pubs/ft/weo/2000/01/pdf/_chapter3pdf.ashx

Grading Criteria:

1. Originality: How original is your report/assignment?

2. Analysis: Does your analysis thoroughly examine the issue or question at hand? How competent is

your analysis?

3. Presentation: Is your report carefully and professionally presented?

Plagiarism: Read, understand, and adhere to University of Sydney policies on plagiarism and dishonesty:

https://www.sydney.edu.au/students/academic-dishonesty.html. It is important to note that plagiarism

is a serious academic offence, and no excuses for failure to understand instances of plagiarism will be

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accepted. Specifically, it is unacceptable to copy figures and text from other sources (including other students’

assignments!). Assignments that contain any such copying will receive a mark of zero. Please also beware of

plagiarism in parts of the written report written by the other members of your group. The entire group will

suffer if there is any occurrence of plagiarism.

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