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The Role of Portfolio Shocks in a Structural Vector Autoregressive Model of the Australian Economy

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  • RENÉE FRY
  • JAMES HOCKING
  • VANCE L. MARTIN

Abstract

Domestic and foreign equity shocks on the Australian economy are analysed within a five‐variate structural vector autoregressive model, with identification achieved through long‐run restrictions based on the natural rate hypothesis, monetary neutrality, long‐run portfolio balance and purchasing power parity. The results show that real equity values were undervalued by 19 per cent by June 2005, with the gap narrowing thereafter. Foreign crises are important factors explaining this deterioration. The real wealth effects of equity market shocks impact significantly upon financial and goods market prices, whereas output tends to be immune. The model is also able to address puzzles that exist in the vector autoregression literature.

Suggested Citation

  • Renée Fry & James Hocking & Vance L. Martin, 2008. "The Role of Portfolio Shocks in a Structural Vector Autoregressive Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 17-33, March.
    • Handle: RePEc:bla:ecorec:v:84:y:2008:i:264:p:17-33
    DOI: 10.1111/j.1475-4932.2008.00444.x
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    2. Tuan Phan, 2014. "Output Composition of the Monetary Policy Transmission Mechanism: Is Australia Different?," The Economic Record, The Economic Society of Australia, vol. 90(290), pages 382-399, September.
    3. de Silva, Ashton, 2008. "Forecasting macroeconomic variables using a structural state space model," MPRA Paper 11060, University Library of Munich, Germany.
    4. Mansur, Alfan, 2019. "Sharia Banking Dynamics and the Macroeconomic Responses: Evidence from Indonesia," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 53(2), pages 139-152.
    5. Dohyun CHUN & Hoon CHO & Doojin RYU, 2018. "Macroeconomic Structural Changes in a Leading Emerging Market: The Effects of the Asian Financial Crisis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 22-42, December.
    6. Mr. Shengzu Wang & Ms. Patrizia Tumbarello, 2010. "What Drives House Prices in Australia? A+L4584 Cross-Country Approach," IMF Working Papers 2010/291, International Monetary Fund.
    7. Mansur, Alfan, 2015. "Identifying Shocks on the Economic Fluctuations in Indonesia and US: The Role of Oil Price Shocks in a Structural Vector Autoregression Model," MPRA Paper 94018, University Library of Munich, Germany, revised 09 Jun 2015.

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