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The Role of Portfolio Shocks in a Structural Vector Autoregressive Model of the Australian Economy *
Author(s) -
FRY RENÉE,
HOCKING JAMES,
MARTIN VANCE L.
Publication year - 2008
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2008.00444.x
Subject(s) - economics , autoregressive model , portfolio , equity (law) , vector autoregression , monetary economics , econometrics , financial economics , purchasing power parity , exchange rate , political science , law
Domestic and foreign equity shocks on the Australian economy are analysed within a five‐variate structural vector autoregressive model, with identification achieved through long‐run restrictions based on the natural rate hypothesis, monetary neutrality, long‐run portfolio balance and purchasing power parity. The results show that real equity values were undervalued by 19 per cent by June 2005, with the gap narrowing thereafter. Foreign crises are important factors explaining this deterioration. The real wealth effects of equity market shocks impact significantly upon financial and goods market prices, whereas output tends to be immune. The model is also able to address puzzles that exist in the vector autoregression literature.