Monetary Volatility and Real Output Volatility: An Empirical Model of the Financial Transmission Mechanism in Australia
32 Pages Posted: 7 Jan 2011
Date Written: 1997
Abstract
This paper examines how monetary volatility is transmitted to the volatility of financial asset prices, inflation and real output in an open economy. A Markowitz efficient portfolio is constructed to eliminate diversifiable financial risk, and estimation by GLS on monthly Australian data from 1972(1)-1994(1) using the general-to-specific estimation strategy overcomes the generated regressors problem in related ARCH-type models. The findings include: first, higher monetary volatility is associated with lower volatility of financial asset prices and higher real output volatility, and second, monetary volatility is transmitted to real output volatility predominantly through the share market with no foreign exchange market effect.
Keywords: monetary volatility transmission, real output volatility, GLS
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