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Credit and Monetary Policy: An Australian SVAR

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  • Leon Berkelmans

    (Reserve Bank of Australia)

Abstract

Credit is an important macroeconomic variable that helps to drive economic activity and is also dependent on economic activity. This paper estimates a small structural vector autoregression (SVAR) model for Australia to examine the intertwined relationships of credit with other key macroeconomic variables. At short horizons, shocks to the interest rate, the exchange rate, and past shocks to credit are found to be important for credit growth. Over longer horizons, shocks to output, inflation and commodity prices play a greater role. The response of credit to changes in monetary policy is found to be relatively slow, similar to that of inflation and slower than that of output. The model suggests that an unexpected 25 basis point increase in the interest rate results in the level of credit being almost half of a percentage point lower than it otherwise would have been after a bit over one year, and almost 1 per cent lower after four years. Estimates from the model indicate that in responding to the macroeconomic consequences of a credit shock, monetary policy appears to stabilise the economy effectively. As a result of monetary policy’s response, output and the exchange rate are barely affected by a credit shock. The credit shock results in higher inflation for about two years, but it would be higher still over this period in the absence of a monetary policy response. Changes in credit are also moderated as a result of monetary policy’s response.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2005-06.

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Date of creation: Sep 2005
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Handle: RePEc:rba:rbardp:rdp2005-06

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Keywords: credit; credit channel; monetary policy;

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References

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
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Citations

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Cited by:
  1. Mardi Dungey & Renée Fry-McKibbin & Verity Linehan, 2013. "Chinese Resource Demand and the Natural Resource Supplier," CAMA Working Papers 2013-54, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Kristoffer Nimark, 2009. "A structural model of Australia as a small open economy," Economics Working Papers 1211, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Abdul Karim, Zulkefly & Zaidi, Mohd Azlan Shah & W.N.W, Azman-Saini, 2011. "Relative price effects of monetary policy shock in Malaysia: a svar study," MPRA Paper 38768, University Library of Munich, Germany.
  4. Vespignani, Joaquin L., 2013. "The industrial impact of monetary shocks during the inflation targeting era in Australia," Working Papers 2012-12, University of Tasmania, School of Economics and Finance, revised 17 Jan 2013.
  5. Tim Robinson, 2013. "Estimating and Identifying Empirical BVAR-DSGE Models for Small Open Economies," RBA Research Discussion Papers rdp2013-06, Reserve Bank of Australia.
  6. Mardi Dungey & Adrian Pagan, 2008. "Extending an SVAR Model of the Australian Economy," NCER Working Paper Series 21, National Centre for Econometric Research.
  7. Jarkko Jääskelä & Penelope Smith, 2011. "Terms of Trade Shocks: What are They and What Do They Do?," RBA Research Discussion Papers rdp2011-05, Reserve Bank of Australia.
  8. de Silva, Ashton, 2008. "Forecasting macroeconomic variables using a structural state space model," MPRA Paper 11060, University Library of Munich, Germany.
  9. Pennings, Steven & Ramayandi, Arief & Tang, Hsiao Chink, 2011. "The Impact of Monetary Policy on Financial Markets in Small Open Economies: More or Less Effective During the Global Financial Crisis?," Working Papers on Regional Economic Integration 72, Asian Development Bank.
  10. Jeremy Lawson & Daniel Rees, 2008. "A Sectoral Model of the Australian Economy," RBA Research Discussion Papers rdp2008-01, Reserve Bank of Australia.
  11. Jarkko Jääskelä, 2007. "More Potent Monetary Policy? Insights from a Threshold Model," RBA Research Discussion Papers rdp2007-07, Reserve Bank of Australia.
  12. Joaquin L. Vespignani, 2013. "The Industrial Impact of Monetary Shocks During the Inflation-Targeting Era in A ustralia," Australian Economic History Review, Economic History Society of Australia and New Zealand, vol. 53(1), pages 47-71, 03.
  13. David Jacobs & Vanessa Rayner, 2012. "The Role of Credit Supply in the Australian Economy," RBA Research Discussion Papers rdp2012-02, Reserve Bank of Australia.
  14. Stephen J. Knop & Joaquin L. Vespignani, 2014. "The sectorial impact of commodity price shocks in Australia," CAMA Working Papers 2014-19, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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