Dutch Disease in Australia: A Structural VAR Model

Abstract

We applied a Structural VAR model to empirically investigate the adverse effect of positive growth shock in the resource sector on economic activity in a small open economy, like Australia. We observed the key eight variables important for explaining the evidence of Dutch disease over the period of 1984:Q1 to 2016:Q4. The 2000s boom is the first mining boom in Australia after the adoption of the floating exchange rate, inflation targeting, and de-centralised wage system. We analysed how different sectors have adapted from the mining boom shock, and whether the changes in policies have influenced the sectors capacity to adjust to an economic shock. We identified the structural shocks using short-run Cholesky decomposition by making system recursive. The result showed that the foreign demand shock caused to raise the price of the commodity, and shock to the commodity price cause the real exchange rate to appreciate and has a positive impact on resource output. However, the aggregate real GDP, the non-resource tradeable and non-tradeable gross value-added declined in the long-run.