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International Transmissions to Australia: The Roles of the US and Euro Area

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Abstract

This paper examines the influences of the two largest developed economies, namely the US and the Euro area, on Australia as an exemplar of a small open economy. To do so, we specify and estimate a structural VAR with bilateral linkages between the two large economies, and allow shocks originating there to affect the Australian economy. More specifically, we show the role of foreign demand shocks, the differential effects of US or European sourced inflation and interest rate shocks on the Australian economy, and the relative unimportance of these foreign shocks to variations in the value of the Australian currency

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File URL: http://eprints.utas.edu.au/17208/1/2013-10_DunOsbRag.pdf
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Bibliographic Info

Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 17208.

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Length: 37 pages
Date of creation: 16 Oct 2013
Date of revision: 16 Oct 2013
Publication status: Published by the University of Tasmania. Discussion paper 2013-10
Handle: RePEc:tas:wpaper:17208

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Fax: +61 3 6226 7587
Web page: http://www.utas.edu.au/economics-finance/
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Keywords: VAR; open economy; Australia;

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References

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  1. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
  2. Sack, Brian & Wieland, Volker, 2000. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 205-228.
  3. Rabanal, Pau & Rubio-Ramírez, Juan F. & Tuesta, Vicente, 2011. "Cointegrated TFP processes and international business cycles," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 156-171, March.
  4. Daniel Buncic & Martin Melecky, 2008. "An Estimated New Keynesian Policy Model for Australia," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 1-16, 03.
  5. Bernard, A.B. & Durlauf, S.N., 1993. "Convergence in International Output," Working papers 93-7, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Guerron-Quintana, Pablo A., 2013. "Common and idiosyncratic disturbances in developed small open economies," Journal of International Economics, Elsevier, vol. 90(1), pages 33-49.
  7. Leu, Shawn Chen-Yu, 2011. "A New Keynesian SVAR model of the Australian economy," Economic Modelling, Elsevier, vol. 28(1), pages 157-168.
  8. Edda Claus & Mardi Dungey & Renee Fry, 2006. "Monetary Policy In Illiquid Markets: Options For A Small Open Economy," CAMA Working Papers 2006-17, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  9. Leu, Shawn Chen-Yu & Sheen, Jeffrey, 2011. "A small New Keynesian state space model of the Australian economy," Economic Modelling, Elsevier, vol. 28(1), pages 672-684.
  10. Kristoffer Nimark, 2007. "A Structural Model of Australia as a Small Open Economy," RBA Research Discussion Papers rdp2007-01, Reserve Bank of Australia.
  11. Heather M. Anderson & Mardi Dungey & Denise R Osborn & Farshid Vahid, 2010. "Financial Integration and the Construction of Historical Financial Data for the Euro Area," Centre for Growth and Business Cycle Research Discussion Paper Series 152, Economics, The Univeristy of Manchester.
  12. Fabio Milani, 2009. "Global Slack and Domestic Inflation Rates: A Structural Investigation for G-7 Countries," Working Papers 080919, University of California-Irvine, Department of Economics.
  13. Michael Plumb & Christopher Kent & James Bishop, 2013. "Implications for the Australian Economy of Strong Growth in Asia," RBA Research Discussion Papers rdp2013-03, Reserve Bank of Australia.
  14. Dungey, Mardi & Fry-McKibbin, Renée & Linehan, Verity, 2013. "Chinese resource demand and the natural resource supplier," Working Papers 17027, University of Tasmania, School of Economics and Finance, revised 01 Jul 2013.
  15. Lance A Fisher & Syeon-seung Huh & Adrian Pagan, 2013. "Econometric Issues when Modelling with a Mixture of I(1) and I(0) Variables," NCER Working Paper Series 97, National Centre for Econometric Research.
  16. Sean Langcake & Tim Robinson, 2013. "An Empirical BVAR-DSGE Model of the Australian Economy," RBA Research Discussion Papers rdp2013-07, Reserve Bank of Australia.
  17. Lee, Hyun-Hoon & Huh, Hyeon-Seung & Harris, David, 2003. "The relative impact of the US and Japanese business cycles on the Australian economy," Japan and the World Economy, Elsevier, vol. 15(1), pages 111-129, January.
  18. Voss, G.M. & Willard, L.B., 2009. "Monetary policy and the exchange rate: Evidence from a two-country model," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 708-720, December.
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