Chinese Liquidity Effects on the Australian Macroeconomy, 2002-2017

Abstract

China’s growing importance to the Australian economy has been well recognized in policy circles but remained relatively untested in formal empirical analysis. This paper examines the reactions of Australian macroeconomic variables to Chinese money growth and inflation over the post-2002 period using VAR estimation, historical decompositions and long-run cointegration models. The consistent impact of Chinese money growth on Australian inflation and on the exchange rate seen in the VAR analysis is supplemented by evidence of cointegrating relationships between the Australian variables and both Chinese money growth and Chinese inflation.

Keywords: International transmission, Australia, China, liquidity, VAR/VECM

JEL Classification: F42, F36