Oil and Iron Ore Price Shocks: What are the Different Economic Effects in Australia?

18 Pages Posted: 14 Jun 2018

See all articles by Nam Hoang

Nam Hoang

University of New England

Bao Nguyen

School of Economics, University of Economics Ho Chi Minh City (UEH), Vietnam; Development Policy Centre, Crawford School of Public Policy, ANU; Centre for Applied Macroeconomic Analysis, ANU

Date Written: June 2018

Abstract

This paper compares the macroeconomic effects of global oil and iron ore price shocks on the Australian economy. Using a Bayesian structural vector autoregression model with sign restrictions, we identify three types of shock: supply, demand and specific demand. The main results suggest that, over the period from 1990Q1 to 2014Q4, the oil shock had a relative larger impact than the iron ore shock on output and inflation, while the iron ore shock was the dominant source of interest and exchange rate movements. The effects crucially depend on the underlying sources of oil or iron ore price shifts. As Australia is a small open economy, oil and iron ore prices should be treated as exogenous factors. Real GDP responds negatively to a rise in oil prices driven by supply disruptions, but positively to a similar shock on the iron ore market. Higher global demand for these commodities has a positive impact on the economy, but the iron ore demand shock is about twice larger. However, a positive oil and iron ore price shock driven by specific demand lead to a temporary decline in real GDP.

Suggested Citation

Hoang, Nam and Nguyen, Bao, Oil and Iron Ore Price Shocks: What are the Different Economic Effects in Australia? (June 2018). Economic Record, Vol. 94, Issue 305, pp. 186-203, 2018, Available at SSRN: https://ssrn.com/abstract=3196147 or http://dx.doi.org/10.1111/1475-4932.12398

Nam Hoang (Contact Author)

University of New England ( email )

Armidale
Armidale, New South Wales 2351
Australia

Bao Nguyen

School of Economics, University of Economics Ho Chi Minh City (UEH), Vietnam; Development Policy Centre, Crawford School of Public Policy, ANU; Centre for Applied Macroeconomic Analysis, ANU ( email )

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