The Industrial Impact of Monetary Shocks During the Inflation‐Targeting Era in Australia

Abstract

In this article we analyse the industrial impact of monetary shocks since inflation targeting has been introduced in Australia (1990). These impacts are quantified by constructing a structural vector autoregressive (SVAR) model for a small open economy. Our results show that construction and manufacturing industries exhibit a significant reduction in gross value added (GVA) after an unanticipated rise in the official cash rate. However, the finance and insurance industry, and the mining industry, seem to be unaffected by these shocks.JEL categories: E50, E58 and C32

The Sectorial Impact of Commodity Price Shocks in Australia

“…Consistent with existing Australian SVAR literature (Brischetto and Voss, 1999;Berkelmans, 2005;Lawson and Rees, 2008;Vespignani, 2013), real Australian GDP ‫ܲܦܩܣ(‬ ି௧ ) is used as a measure of domestic output. Following Jääskelä andSmith (2011) andDungey, Fry-Mckibbin andLinehan (2014), non-farm GDP is used, as farm GDP can suffer from extreme short-term volatility due to weather effects.…”

“…In order to analyse industry specific responses, the variable ‫ܲܦܩܣ‬ ି௧ is defined as Australian GDP minus the GVA of industry i. This method follows Lawson and Rees (2008) and Vespignani (2013) and ensures that ‫ܲܦܩܣ‬ ି௧ and ‫ܦܰܫ‬ ௧ sum to total Australian nonfarm GDP when analysing each individual industry. ‫ܦܰܫ‬ ௧ is the real GVA of industry i.…”

“…The second group of variables represents the Australian economy and builds on the models of Dungey and Pagan (2000), Lawson and Rees (2008), Vespignani (2013) and Dungey, Fry-Mckibbin and Linehan (2014).…”

“…These foreign variables are specified as strictly exogenous, which follows Jacobs and Rayner (2012) and Vespignani (2013). ‫ܦܰܫ‬ ௧ is contemporaneously affected by commodity prices and Australian GDP.…”

“…4 The start date coincides with the start of inflation targeting by the Reserve Bank of Australia. Dungey and Pagan (2000), Jääskelä and Smith (2011) and Dungey, Fry-Mckibbin and Linehan (2014), while also integrating the methodology of analysing specific industries, as in Lawson and Rees (2008) and Vespignani (2013).…”