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Australia's Deflation in the 1890s

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  • Colin McKenzie

Abstract

The purpose of this paper is to examine two factors, gold production and export prices, that have been suggested as having aided Australia's escape from the deflation it faced in the early 1890s. In order to examine the factors influencing Australian domestic prices in the second half of the nineteenth century, annual data over the period 1861-1900 are used to estimate a structural vector autoregression. Causality tests in a reduced form vector autoregression suggest that two factors Granger cause the movements in Australian domestic prices, namely export prices and net exports. In contrast, movements in gold production in Australia do not significantly directly cause Australian domestic prices, but have some indirect effect through the interest rate and net exports. Impulse response functions computed from the structural vector autoregression suggest that shocks in export prices lead to a rise in domestic prices, but shocks in gold production do not. Perhaps surprisingly, an export price shock leads to a fall in net exports in the medium term. Changes in capital flows would appear to be an important adjustment channel.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 06017.

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Length: 28 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:eti:dpaper:06017

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  1. Tamim Bayoumi & Barry J. Eichengreen, 1995. "The Stability of the Gold Standard and the Evolution of the International Monetary System," IMF Working Papers 95/89, International Monetary Fund.
  2. Chay Fisher & Christopher Kent, 1999. "Two Depressions, One Banking Collapse," RBA Research Discussion Papers rdp1999-06, Reserve Bank of Australia.
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