RDP 2008-01: A Sectoral Model of the Australian Economy 7. Conclusion

Using a sectoral SVAR we find evidence that the two most interest-sensitive expenditure components of GDP are residential investment and machinery & equipment investment, while the most interest-sensitive production components of GDP are construction and retail trade. We also present evidence showing that monetary policy has helped to dampen the effect of US monetary policy and domestic consumption shocks.

The results are largely robust to the inclusion of additional variables, alternative identification schemes and the sample period over which the model is estimated. There is some weak evidence that the investment components of GDP have become more interest sensitive over time. We also found that large monetary policy shocks have become less prevalent in the inflation-targeting period, consistent with the proposition that monetary policy has become more transparent and predictable. Foreign shocks appear to have become correspondingly more important in explaining the variation in domestic activity.