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

Author

Listed:
  • 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.

Suggested Citation

  • Nicolas de Roos & Bill Russell, 1996. "Towards an Understanding of Australia’s Co-movement with Foreign Business Cycles," RBA Research Discussion Papers rdp9607, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp9607
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Nicolas De Roos & Bill Russell, 2002. "The Exports Transmission Mechanism of Foreign Business Cycles to Australia," The Economic Record, The Economic Society of Australia, vol. 78(240), pages 50-59, March.
    3. Nicolas De Roos & Bill Russell, 2000. "An Empirical Note on the Influence of the US Stock Market on Australian Economic Activity," Australian Economic Papers, Wiley Blackwell, vol. 39(3), pages 291-300, September.
    4. Zouri, Stéphane, 2019. "Business cycles,bilateral trade and international financial intergration : Evidence from Economic Community of West African States (ECOWAS)," MPRA Paper 98748, University Library of Munich, Germany.
    5. Gordon de Brouwer & John Romalis, 1996. "External Influences on Output: An Industry Analysis," RBA Research Discussion Papers rdp9612, Reserve Bank of Australia.
    6. David Gruen & John Romalis & Naveen Chandra, 1999. "The Lags of Monetary Policy," The Economic Record, The Economic Society of Australia, vol. 75(3), pages 280-294, September.
    7. Kolasa, Marcin & Rubaszek, Michał, 2018. "Does the foreign sector help forecast domestic variables in DSGE models?," International Journal of Forecasting, Elsevier, vol. 34(4), pages 809-821.
    8. 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.
    9. 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.
    10. Dan Andrews & Marion Kohler, 2005. "International Business Cycle Co-movements through Time," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & David Norman (ed.),The Changing Nature of the Business Cycle, Reserve Bank of Australia.
    11. Gordon de Brouwer & James O'Regan, 1997. "Evaluating Simple Monetary-policy Rules for Australia," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    12. Glenn Otto & Graham Voss & Luke Willard, 2001. "Understanding OECD Output Correlations," RBA Research Discussion Papers rdp2001-05, Reserve Bank of Australia.
    13. 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.
    14. 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.
    15. 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 321-342, December.
    16. Brooks, Chris & Henry, Olan T., 2000. "Linear and non-linear transmission of equity return volatility: evidence from the US, Japan and Australia," Economic Modelling, Elsevier, vol. 17(4), pages 497-513, December.
    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. 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, June.
    19. Leon Berkelmans, 2005. "Credit and Monetary Policy: An Australian SVAR," RBA Research Discussion Papers rdp2005-06, Reserve Bank of Australia.
    20. 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.
    21. Zouri, Stéphane, 2019. "Business cycles,bilateral trade and international financial intergration : Evidence from Economic Community of West African States (ECOWAS)," MPRA Paper 95275, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O56 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Oceania

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