A simulation on the dynamics of Australia trade balance with USA

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中图分类号:F742文献标识:A 文章编号:1009-4202(2010)09-045-01

Abstract This paper aims to simulate the dynamic behaviour of australia trade balance with usa in response to shocks in its determinants and investigate appropriate policy reactions to these changes.

Key words Australia trade balance with USA Multi-period Model Event breaks Policy reaction

1.Introduction

The trade between Australia and the United States is a significant component of Australia international trade,its direction and magnitude undoubtedly exert significant influence upon Australian economy. Paddy JILEK,A. J.,BRUCE TAPLIN (1993) raised the importance of internal and external competitiveness to Australia trade balance via supply and demand channel;Stephen S Kyereme (2002) summarised that price ratio,lending rate ratio,GDP ratio,money supply ratio and real exchange rate explain the main variation in the trade between Australia and USA;Martin Folk (2008) concluded that real effective exchange rate,foreign and domestic incomes have the expected sign and could explain the aggregate trade balance.

2.Data collection and justification

Data are collected from Australian Bureau of Statistics,Reserve Bank of Australia and Federal Reserve: Australian Net Trade Balance with USA,Australia-USA Exchange rate,Australian Gross Domestic Product,Australian Consumer Price Index,Australian 5-year Government Bond Interest Rate,USA Gross Domestic Product,USA Consumer Price Index,USA 5-year Government Bond Interest Rate. The data set covers from January,1990 to June,2010 with monthly frequency in order to incorporate sufficient relevant information and ensure parameters are stable within the selected period. Initially,Grubb’s test outlier test suggests no outliers in the underlying data set. Next,unit root tests indicate that most series have unit root except AUCPI and USCPI (which are already indexes calculated in growth rate forms),so transformation are made: ,where t=2,3…, andare the new and original variables respectively. It can be demonstrated that the transformation remove the unit root and all the series are stationary now. Then according to the Pairwise Correlation Matrix,AU Interest Rate and US interest Rate are highly correlated,thus US5GBIR is taken out to rule out the possibility of multicollinearity.

3.Model construction and estimation

Ramsey Reset test on OLS model shows existence of non-linear relationship between AUTBUS and independent variables,thus non-linear terms are constructed to reflect their significance upon the model.

Break point tests upon the candidate model suggest potential structural breaks,a study on historical evolution of Australia Trade with USA shows: In March,1991,the general tariff reduction program began;In September,2000,Sydney Olympic Games was held and Australia commenced liberalizing market access and national treatment concessions according to WTO agreement. Thus,two dummy variables are introduced into the model: Dummy1 with value 0 before March,1991 and 1 since the turning point;Dummy2 with value 0 before September,2000 and 1 since the turning point. Below is the estimated model:

4.Result Interpretation and policy suggestion

The model estimation falls into 3 scenarios: (I) Before event break 1: Australia GDP,Australia Interest Rate,USA GDP and Australia CPI exert positive influence upon Australia net trade balance,among which the impact of Australia GDP is significant;while Exchange rate and USA CPI generate negative forces upon Australia net trade balance,among which the effect of USA CPI in terms of Australian dollars is significant. (II) After event break 1 and before event break 2: the magnitude of Australia GDP’s influence upon Net Trade Balance is larger;the effect of AU Interest Rate increases and become significant;the impact of USA GDP transfers from positive to negative direction and the magnitude is significant;the negative influence of USA CPI becomes smaller but still significant;the effect of AUCPI evolves from positive to negative and become significant. (III) After event break 2: the magnitude of positive impacts of AUGDP and AU Interest Rate become smaller and less significant;the influence of USA GDP reverses back to both positive and significant;USA CPI still exerts positive forces but insignificant in this stage;AUCPI’s impact becomes even more negative but insignificant.

Thus far,policy makers track sensitive variables such as GDP,CPI,Interest Rate and Exchange Rate in order to combine fiscal and monetary policies which possess immunity and resistance to unexpected shocks.

Reference:

[1]FALK, M. 2008. Determinants of the Trade Balance in Industrialized Countries. FIW Research Report.

[2]KYEREME, S. S. 2002. Determinants of United States' Trade Balance with Australia. Applied Economics,34, 10.

[3]PADDY JILEK, A. J., BRUCE TAPLIN 1993. Exports, Imports and the Trade Balance. Treasury Conference on The TRYM Model of the Australian Economy.