International SVAR Factor Modelling

Models of Australia proxy international linkages using the US, despite Japan being an equivalent trading partner. This paper uses a Kahnan filter to extract US and Japanese reference cycles which are then used in an SVAR model of the Australian economy. The US and Japanese shocks are interpreted to be aggregate demand and interest rate shocks respectively. The results show that US shocks axe dominant for Australian outcomes, but the model is misspecified if Japan is excluded. The role of Japan is to dampen expansionary US shocks. Further, Australian monetary policy responds to domestic conditions, rather than international monetary policy.