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International Shocks and the Role of Domestic Policy in Australia

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  • Mardi Dungey

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

Paper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 443.

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Length: 42 pages
Date of creation: Dec 2001
Date of revision:
Handle: RePEc:auu:dpaper:443

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Keywords: VAR; open economy; monetary policy;

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References

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  1. 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, Central Bank of Chile 101, Central Bank of Chile.
  2. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, American Economic Association, vol. 90(2), pages 1-16, May.
  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, Reserve Bank of Australia 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, Taylor & Francis Journals, vol. 31(3), pages 397-407.
  6. Summers, Peter M., 2001. "Forecasting Australia's economic performance during the Asian crisis," International Journal of Forecasting, Elsevier, Elsevier, vol. 17(3), pages 499-515.
  7. 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, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 32(2), pages 197-205.
  8. 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, The Economic Society of Australia, vol. 72(219), pages 345-58, December.
  9. 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, Department of Economics, UC San Diego qt4qp0p0v5, Department of Economics, UC San Diego.
  10. Jacqueline Dwyer & Kenneth Leong, 2001. "Changes in the Determinants of Inflation in Australia," RBA Research Discussion Papers, Reserve Bank of Australia rdp2001-02, Reserve Bank of Australia.
  11. 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.
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Cited by:
  1. Mardi Dungey & Adrian Pagan, 2008. "Extending an SVAR Model of the Australian Economy," NCER Working Paper Series, National Centre for Econometric Research 21, National Centre for Econometric Research.
  2. 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.
  3. Philip Liu, 2008. "The Role of International Shocks in Australia’s Business Cycle," RBA Research Discussion Papers, Reserve Bank of Australia rdp2008-08, Reserve Bank of Australia.

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