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Oil and Iron Ore Price Shocks: What Are the Different Economic Effects in Australia?

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  • Nam T. Hoang
  • Bao H. Nguyen

Abstract

This paper compares the macroeconomic effects of global oil and iron ore price shocks on the Australian economy. Using a Bayesian structural vector autoregression model with sign restrictions, we identify three types of shock: supply, demand and specific demand. The main results suggest that, over the period from 1990Q1 to 2014Q4, the oil shock had a relative larger impact than the iron ore shock on output and inflation, while the iron ore shock was the dominant source of interest and exchange rate movements. The effects crucially depend on the underlying sources of oil or iron ore price shifts. As Australia is a small open economy, oil and iron ore prices should be treated as exogenous factors. Real GDP responds negatively to a rise in oil prices driven by supply disruptions, but positively to a similar shock on the iron ore market. Higher global demand for these commodities has a positive impact on the economy, but the iron ore demand shock is about twice larger. However, a positive oil and iron ore price shock driven by specific demand lead to a temporary decline in real GDP.

Suggested Citation

  • Nam T. Hoang & Bao H. Nguyen, 2018. "Oil and Iron Ore Price Shocks: What Are the Different Economic Effects in Australia?," The Economic Record, The Economic Society of Australia, vol. 94(305), pages 186-203, June.
  • Handle: RePEc:bla:ecorec:v:94:y:2018:i:305:p:186-203
    DOI: 10.1111/1475-4932.12398
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    File URL: https://doi.org/10.1111/1475-4932.12398
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    1. Ma, Yiqun & Wang, Junhao, 2019. "Co-movement between oil, gas, coal, and iron ore prices, the Australian dollar, and the Chinese RMB exchange rates: A copula approach," Resources Policy, Elsevier, vol. 63(C), pages 1-1.

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