Monetary Volatility and Real Output Volatility: An Empirical Model of the Financial Transmission Mechanism in Australia

32 Pages Posted: 7 Jan 2011

See all articles by Colm Kearney

Colm Kearney

Monash University - Monash Business School

Kevin Daly

University of Western Sydney - School of Business

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

Suggested Citation

Kearney, Colm and Daly, Kevin, Monetary Volatility and Real Output Volatility: An Empirical Model of the Financial Transmission Mechanism in Australia (1997). International Review of Financial Analysis, Vol. 6, No. 2, 1997, Available at SSRN: https://ssrn.com/abstract=1734767

Colm Kearney

Monash University - Monash Business School ( email )

Sir John Monash Drive
Caulfield
Melbourne, Victoria 3168
Australia
+353399031021 (Phone)

Kevin Daly (Contact Author)

University of Western Sydney - School of Business ( email )

Sydney, NSW 1797
Australia

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