A Structural Vector Autoregression Model of Monetary Policy in Australia

Andrea Brischetto and Graham Voss
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Andrea Brischetto: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: This paper examines the effects of monetary policy in Australia using a small structural vector autoregression model. The model we use is a modification of the small open economy model developed for the G6 economies (the G7 less the United States) by Kim and Roubini (1999). The success of the Kim and Roubini model across these economies makes it a natural starting point to analyse monetary policy in Australia. Consistent with Kim and Roubini, we find no evidence of the price or exchange rate puzzles identified in the literature. We demonstrate that, in the Australian context, modelling the interdependence between the domestic interest rate, the foreign interest rate and the nominal exchange rate is critical to resolving these puzzles. Further, we demonstrate that the Kim and Roubini model can be further usefully refined when applied to the Australian data. We use the model to perform various monetary policy experiments and the results of these experiments accord well with both the existing SVAR literature and previous empirical work for Australia. We find that monetary policy shocks have a delayed and gradual effect on the price level and a small temporary effect on output. We also use the model to examine the effects of shocks to the Australian economy and the role of monetary policy in response to these shocks. Generally, we find that monetary policy has served to dampen both output and price fluctuations. A qualifying aspect of our results is the model’s instability, for example, around the most recent change in the implementation of monetary policy in Australia.

Keywords: exchange rates; monetary transmission mechanism; structural vector autoregressions (search for similar items in EconPapers)
JEL-codes: E37 E61 F31 F47 F52 (search for similar items in EconPapers)
Date: 1999-12
New Economics Papers: this item is included in nep-ets and nep-mon
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Citations: View citations in EconPapers (107)

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