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International Shocks and the Role of Domestic Policy in Australia

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  • Mardi Dungey

    ()
    (The Australian National University)

Abstract

In the presence of large international disturbances small open economies are faced with difficult policy choices. International conditions impact on domestic outcomes. Using a structural VAR model of the Australian economy I explore the ways in which domestic monetary policy contributes to the output outcomes experienced in the economy. The focus is on the impact of international shocks. Monetary policy is modelled using a cash rate response to GNE, inflation and real exchange rate shocks. The results show that removing the focus on either GNE or inflation leads to lower GDP outcomes for the economy. The challenge for domestic policy is to recognise and respond to international and domestic shocks to the maximum benefit of the domestic economy.

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Bibliographic Info

Article provided by Bankwest Curtin Economics Centre (BCEC), Curtin Business School in its journal Australian Journal of Labour Economics.

Volume (Year): 5 (2002)
Issue (Month): 2 (June)
Pages: 143-163

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Handle: RePEc:ozl:journl:v:5:y:2002:i:2:p:143-163

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Web page: http://business.curtin.edu.au/research/publications/journals/ajle/
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Keywords: Monetary Policy (Targets; instruments; and Effects); Open Economy Macroeconomics;

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References

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  1. Peter M. Summers, 1999. "Macroeconomic Forecasting at the Melbourne Institute," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 32(2), pages 197-205.
  2. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
  3. Laurence Ball, 2002. "Policy Rules and External Shocks," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 3, pages 047-064 Central Bank of Chile.
  4. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia.
  5. Hyeon-Seung Huh, 1999. "How well does the Mundell-Fleming model fit Australian data since the collapse of Bretton Woods?," Applied Economics, Taylor & Francis Journals, vol. 31(3), pages 397-407.
  6. Herrera, Ana Maria & Hamilton, James D., 2001. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy," University of California at San Diego, Economics Working Paper Series qt4qp0p0v5, Department of Economics, UC San Diego.
  7. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, vol. 90(2), pages 1-16, May.
  8. Jacqueline Dwyer & Kenneth Leong, 2001. "Changes in the determinants of inflation in Australia," BIS Papers chapters, in: Bank for International Settlements (ed.), Empirical studies of structural changes and inflation, volume 3, pages 1-28 Bank for International Settlements.
  9. Summers, Peter M., 2001. "Forecasting Australia's economic performance during the Asian crisis," International Journal of Forecasting, Elsevier, vol. 17(3), pages 499-515.
  10. Fisher, Lance A, 1996. "Sources of Exchange Rate and Price Level Fluctuations in Two Commodity Exporting Countries: Australia and New Zealand," The Economic Record, The Economic Society of Australia, vol. 72(219), pages 345-58, December.
  11. Jacqueline Dwyer & Kenneth Leong, 2001. "Changes in the Determinants of Inflation in Australia," RBA Research Discussion Papers rdp2001-02, Reserve Bank of Australia.
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Cited by:
  1. Philip Liu, 2007. "Stabilizing The Australian Business Cycle: Good Luck Or Good Policy?," CAMA Working Papers 2007-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Philip Liu, 2008. "The Role of International Shocks in Australia’s Business Cycle," RBA Research Discussion Papers rdp2008-08, Reserve Bank of Australia.
  3. Mardi Dungey & Adrian Pagan, 2009. "Extending a SVAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 85(268), pages 1-20, 03.

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