Output Composition of the Monetary Policy Transmission Mechanism: Is Australia Different?

Abstract

This paper compares the output composition of the monetary policy transmission mechanism in Australia to those for the Euro area and the United States. Four Vector Autoregressive (VAR) models are used to estimate the contributions of private consumption and investment to output reactions resulting from nominal interest rate shocks for the period 1982Q3-2007Q4. The results suggest that the investment channel plays a more important role than the consumption channel in Australia, while the contributions of the two channels are indistinguishable in the Euro area and the U.S. The difference between Australia and the Euro area comes from differences in housing investment responses, whereas Australia is different to the U.S. mainly because it has a lower share of household consumption in total demand.

Credit Spreads, Monetary Policy and the Price Puzzle

“…Brischetto and Voss (1999) find that controlling for US interest rates and the Australian dollar exchange rate is crucial to remove the price puzzle. Using more recent data, Jacobs and Rayner (2012) and Phan (2014) find strong price puzzles even in similar (successful) specifications to the earlier Australian research. This has raised the question whether identification of the effects of monetary policy in Australia has become more difficult since the advent of inflation targeting in the early 1990s.…”