The relative impact of the US and Japanese business cycles on the Australian economy

Abstract

The purpose of this paper is to assess the relative impact of the US and Japanese business cycles on the Australian economy. Our vector autoregression (VAR) models include real gross domestic products (GDPs) of three countries and world average oil price, which are quarterly covering the period 1959:3–1996:4. In order to take account of a possible structural change, estimates are also made separately for the fixed exchange rate and flexible exchange rate periods. The rolling regression technique is utilised to trace the patterns and extents of changing importance between the US and Japan’s impacts on the Australian economy. We find that over the entire sample period, the business cycles of both the US and Japan have the significant impacts on movements in Australian GDP. Under the recent flexible exchange rates, however, the impact of US output becomes greater, while the Japanese impact becomes smaller and negative. It also appears that US output has significant impacts in both short and longer term, while Japanese output has little impact in the short term, but greater impact in the longer term.