Portfolio Shocks and the Dynamics of the Real Economy of Australia (1980-2014): A Structural Vector Autoregressive Model Approach

Abstract

This paper analyses domestic and foreign equity shocks under long-run restrictions on the Australian macroeconomy using a five-variable SVAR model. Evidence reveals that aggregate supply shocks produce positive wealth effects coming from increasing real value of Australian equity as the goods prices fall. Moreover, the channels of how Australian portfolio shocks affect the Australian economy are through interest rates and prices in the goods market. Australian portfolio also acts as a channel for wealth effect arising from the foreign equity market. There was some reduction in the Australian households’ wealth following the global financial crises, but shows strong resilience as it quickly rebounded due to the strong aggregate supply shocks. The role of Australian equity to its domestic economy in recent time is getting stronger than in the past since the equity market capitalization has grown enormously in the last decade