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Towards an Understanding of Australia’s Co-movement with Foreign Business Cycles

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  • Nicolas de Roos

    (Reserve Bank of Australia)

  • Bill Russell

    (Reserve Bank of Australia)

Abstract

This paper identifies two transmission mechanisms which might contribute to explaining the well-documented correlation between Australian and foreign business cycles. The first is through exports. We find that the US and Japan have a high output elasticity of demand for Australia’s exports. Consequently, their business cycles have a larger impact on Australia’s exports than that suggested by their market shares. The second mechanism is through the share market. Both the US and Australian share markets appear to have a significant impact on Australian activity. Evidence is also found that the responses of investment to the share market in the two countries are remarkably similar. Given that the share markets are highly correlated, the similarity in response lags may help to explain the correlation in business cycles.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9607.

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Date of creation: Nov 1996
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Handle: RePEc:rba:rbardp:rdp9607

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  1. Philip Lowe, 1992. "The Term Structure of Interest Rates, Real Activity and Inflation," RBA Research Discussion Papers rdp9204, Reserve Bank of Australia.
  2. David Gruen & Geoffrey Shuetrim, 1994. "Internationalisation and the Macroeconomy," RBA Annual Conference Volume, in: Philip Lowe & Jacqueline Dwyer (ed.), International Intergration of the Australian Economy Reserve Bank of Australia.
  3. Canova, Fabio & De Nicolo', Gianni, 1995. "Stock returns and real activity: A structural approach," European Economic Review, Elsevier, vol. 39(5), pages 981-1015, May.
  4. Fama, Eugene F, 1990. " Stock Returns, Expected Returns, and Real Activity," Journal of Finance, American Finance Association, vol. 45(4), pages 1089-1108, September.
  5. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  6. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  7. Mark L. Gertler, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," NBER Working Papers 2559, National Bureau of Economic Research, Inc.
  8. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  9. Paul D. McNelis, 1993. "The Response of Australian Stock, Foreign Exchange and Bond Markets to Foreign Asset Returns and Volatilities," RBA Research Discussion Papers rdp9301, Reserve Bank of Australia.
  10. Geske, Robert & Roll, Richard, 1983. " The Fiscal and Monetary Linkage between Stock Returns and Inflation," Journal of Finance, American Finance Association, vol. 38(1), pages 1-33, March.
  11. Kaul, Gautam, 1987. "Stock returns and inflation : The role of the monetary sector," Journal of Financial Economics, Elsevier, vol. 18(2), pages 253-276, June.
  12. Pitchford, J., 1992. "Macroeconomic Policy Issues of the 1990s," CEPR Discussion Papers 263, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  13. Robert F. Engle & Sharon Kozicki, 1990. "Testing For Common Features," NBER Technical Working Papers 0091, National Bureau of Economic Research, Inc.
  14. Gordon Menzies & Geoffrey Heenan, 1993. "Explaining the Recent Performance of Australia’s Manufactured Exports," RBA Research Discussion Papers rdp9310, Reserve Bank of Australia.
  15. Kenneth A. Froot & Jeremy C. Stein, 1992. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," NBER Working Papers 2914, National Bureau of Economic Research, Inc.
  16. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  17. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
  18. Blundell-Wignall, Adrian & Browne, Frank & Tarditi, Alison, 1995. "Financial Liberalization and the Permanent Income Hypothesis," The Manchester School of Economic & Social Studies, University of Manchester, vol. 63(2), pages 125-44, June.
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Citations

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Cited by:
  1. 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.
  2. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  3. Gordon de Brouwer & John Romalis, 1996. "External Influences on Output: An Industry Analysis," RBA Research Discussion Papers rdp9612, Reserve Bank of Australia.
  4. David Gruen & John Romalis & Naveen Chandra, 1997. "The Lags of Monetary Policy," RBA Research Discussion Papers rdp9702, Reserve Bank of Australia.
  5. Dan Andrews & Marion Kohler, 2005. "International Business Cycle Co-movements through Time," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
  6. Nicholas de Roos & Bill Russell, 2000. "An Empirical Note on the Influence of the US Stock Market on Australian Economic Activity," Dundee Discussion Papers in Economics 109, Economic Studies, University of Dundee.
  7. Andrew Marks & Mehdi Sadeghi, 1998. "Testing the Olson Hypothesis within the Australian Context," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 31(2), pages 130-144.
  8. Leon Berkelmans, 2005. "Credit and Monetary Policy: An Australian SVAR," RBA Research Discussion Papers rdp2005-06, Reserve Bank of Australia.
  9. Gordon de Brouwer & James O'Regan, 1997. "Evaluating Simple Monetary-policy Rules for Australia," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
  10. Alejandro Justiniano, 2004. "Sources and Propagation Mechanims of Foreign Disturbances in Small Open Economies: A Dynamic Factor Analysis," Econometric Society 2004 Latin American Meetings 148, Econometric Society.
  11. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia.
  12. Andrew Stone & Troy Wheatley & Louise Wilkinson, 2005. "A Small Model of the Australian Macroeconomy: An Update," RBA Research Discussion Papers rdp2005-11, Reserve Bank of Australia.
  13. Meredith Beechey & Nargis Bharucha & Adam Cagliarini & David Gruen & Christopher Thompson, 2000. "A Small Model of the Australian Macroeconomy," RBA Research Discussion Papers rdp2000-05, Reserve Bank of Australia.
  14. Pacheco Jiménez, J.F., 2001. "Business cycles in small open economies: the case of Costa Rica," ISS Working Papers - General Series 19075, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
  15. Glenn Otto & Graham Voss & Luke Willard, 2001. "Understanding OECD Output Correlations," RBA Research Discussion Papers rdp2001-05, Reserve Bank of Australia.
  16. Nicholas de Roos & Bill Russell, 2000. "The Exports Transmission Mechanism of Foreign Business Cycles to Australia," Dundee Discussion Papers in Economics 110, Economic Studies, University of Dundee.

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