A Structural Vector Autoregression Model of Monetary Policy in Australia
AbstractThis paper examines the effects of monetary policy in Australia using a small structural vector autoregression model. The model we use is a modification of the small open economy model developed for the G6 economies (the G7 less the United States) by Kim and Roubini (1999). The success of the Kim and Roubini model across these economies makes it a natural starting point to analyse monetary policy in Australia. Consistent with Kim and Roubini, we find no evidence of the price or exchange rate puzzles identified in the literature. We demonstrate that, in the Australian context, modelling the interdependence between the domestic interest rate, the foreign interest rate and the nominal exchange rate is critical to resolving these puzzles. Further, we demonstrate that the Kim and Roubini model can be further usefully refined when applied to the Australian data. We use the model to perform various monetary policy experiments and the results of these experiments accord well with both the existing SVAR literature and previous empirical work for Australia. We find that monetary policy shocks have a delayed and gradual effect on the price level and a small temporary effect on output. We also use the model to examine the effects of shocks to the Australian economy and the role of monetary policy in response to these shocks. Generally, we find that monetary policy has served to dampen both output and price fluctuations. A qualifying aspect of our results is the model’s instability, for example, around the most recent change in the implementation of monetary policy in Australia.
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Bibliographic InfoPaper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp1999-11.
Date of creation: Dec 1999
Date of revision:
Find related papers by JEL classification:
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
- F52 - International Economics - - International Relations and International Political Economy - - - National Security; Economic Nationalism
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-04-17 (All new papers)
- NEP-ETS-2000-04-17 (Econometric Time Series)
- NEP-MON-2000-04-17 (Monetary Economics)
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