Assessing the Synchronicity and Nature of Australian State Business Cycles

19 Pages Posted: 10 Dec 2018

See all articles by Aubrey Poon

Aubrey Poon

University of Strathclyde - Centre for Applied Macroeconomic Analysis

Date Written: December 2018

Abstract

This paper assesses the synchronicity and nature of Australian state business cycles. To this end, I develop a time‐varying parameter panel Bayesian vector autoregression (BVAR) with a novel common stochastic volatility factor in the error structure, which is estimated in an efficient Markov chain Monte Carlo algorithm. The common stochastic volatility factor reveals that macroeconomic volatility was more pronounced during the Asian financial crisis than during the more recent global financial crisis. Next, the panel BVAR's common, state‐ and variable‐specific indicators capture several interesting economic facts. In particular, the fluctuations of the common indicator closely follow the trend line of the Organisation for Economic Co‐operation and Development composite leading indicators for Australia, making it a good proxy for nationwide business cycle fluctuations. Furthermore, despite significant co‐movements of Australian state and territory business cycles during times of economic contractions, the state indicators suggest that the average degree of synchronisation across the Australian state and territory cycles in the 2000s is only half of that in the 1990s. Given that aggregate macroeconomic activity is determined by cumulative activity of each of the states, the results suggests that the federal government should consider granting state governments greater autonomy in handling state‐specific cyclical fluctuations.

Suggested Citation

Poon, Aubrey, Assessing the Synchronicity and Nature of Australian State Business Cycles (December 2018). Economic Record, Vol. 94, Issue 307, pp. 372-390, 2018, Available at SSRN: https://ssrn.com/abstract=3297716 or http://dx.doi.org/10.1111/1475-4932.12441

Aubrey Poon (Contact Author)

University of Strathclyde - Centre for Applied Macroeconomic Analysis ( email )

16 Richmond Street
Glasgow 1XQ, Scotland
United Kingdom

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