The Role of Mining in an Australian Business Cycle Model

The purpose of this paper is to evaluate a business cycle model that includes a mining sector, with the cyclical variations of the Australian Economy. Large quantities of mineral deposits are found in Australia and there exists high demand for these minerals from developing nations. This results in the mining sector contributing to a high proportion of GDP. Surprisingly, the inclusion of a mining sector has not previously been studied in a business cycle model. Australia is a small open economy however, due to a lack of prior literature then, as a first attempt, we assume an economy without a foreign sector. The model built upon a neoclassical growth model, and results were simulated from solving this model via the Blanchard-Kahn method. The statistics generated show that some variables are capable to closely model some of the elements of the Australian economy. However, other variables display standard deviations and contemporaneous correlations, which are substantially different to the actual data. This is implying that the inclusion of the basic mining mechanism alone does not provide the perfect representation of the Australian economy. As the importance of mining is growing in Australia, research should be undertaken to evaluate the impact of the mining sector in economic models.