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

  • Nicolas de Roos

    (Reserve Bank of Australia)

  • Bill Russell

    (Reserve Bank of Australia)

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. 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.
  2. Fama, Eugene F, 1990. " Stock Returns, Expected Returns, and Real Activity," Journal of Finance, American Finance Association, vol. 45(4), pages 1089-1108, September.
  3. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
  4. 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.
  5. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
  6. Froot, Kenneth A & Stein, Jeremy C, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1191-217, November.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. Philip Lowe, 1992. "The Term Structure of Interest Rates, Real Activity and Inflation," RBA Research Discussion Papers rdp9204, Reserve Bank of Australia.
  13. Gordon Menzies & Geoffrey Heenan, 1993. "Explaining the Recent Performance of Australia’s Manufactured Exports," RBA Research Discussion Papers rdp9310, Reserve Bank of Australia.
  14. Robert F. Engle & Sharon Kozicki, 1990. "Testing For Common Features," NBER Technical Working Papers 0091, National Bureau of Economic Research, Inc.
  15. 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.
  16. 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.
  17. 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.
  18. 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.
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