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A Structural Vector Autoregression Model of Monetary Policy in Australia

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Author Info
Andrea Brischetto (Reserve Bank of Australia)
Graham Voss (Reserve Bank of Australia)

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Abstract

This 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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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp1999-11.

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Date of creation: Dec 1999
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Handle: RePEc:rba:rbardp:rdp1999-11

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Keywords: exchange rates monetary transmission mechanism structural vector autoregressions

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Find related papers by JEL classification:
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
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

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  5. Uhlig, Harald, 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," CEPR Discussion Papers 2137, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Renée Fry, 2004. "International demand and liquidity shocks in a SVAR model of the Australian economy," Applied Economics, Taylor and Francis Journals, vol. 36(8), pages 849-863, May. [Downloadable!] (restricted)
  2. Philip Liu, 2007. "Stabilizing The Australian Business Cycle: Good Luck Or Good Policy?," CAMA Working Papers 2007-24, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  3. Dungey, Mardi & Fry, Renee, 2000. "A Multi-Country Structural VAR Model," Departmental Working Papers 2001-04, Australian National University, Economics RSPAS. [Downloadable!]
  4. Mardi Dungey, 2001. "International Shocks and the Role of Domestic Policy in Australia," CEPR Discussion Papers 443, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University. [Downloadable!]
  5. Robert A Buckle & Kunhong Kim & Heather Kirkham & Nathan McLellan & Jared Sharma, 2002. "A structural VAR model of the New Zealand business cycle," Treasury Working Paper Series 02/26, New Zealand Treasury. [Downloadable!]
  6. Renee Fry, 2002. "International SVAR Factor Modelling," School of Economics and Finance Discussion Papers and Working Papers Series 109, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
  7. Norrbin, Stefan, 2001. "What Have We Learned from Empirical Tests of the Monetary Transmission Effect," Working Paper Series 121, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  8. Richard Dennis, 2002. "Exploring the role of the real exchange rate in Australian monetary policy," Working Papers in Applied Economic Theory 2002-19, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  9. Hsiao Chink Tang, 2006. "The Relative Importance Of Monetary Policy Transmission Channels In Malaysia," CAMA Working Papers 2006-23, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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