Exchange Rate Pass-Through and its Impact on Inflation: A Comparative Study for Australia, China and India with

Disaggregated Data
Shrabani Sahaa*, and Zhaoyong Zhanga
a

School of Accounting, Finance and Economics, Edith Cowan University, 270 Joondalup Drive, Joondalup, WA-6027, Australia

Abstract It has been well documented that the exchange rate pass-through to domestic inflation has decreased significantly in the developed countries. This article analyses the exchange rate shocks and its pass-through to various level of prices in two emerging economies and Australia by employing a structural VAR framework over the period 1990-2011. In particular, we assess the pass-through into import, export, producer and consumer prices in Australia, China and India in industries including mining, agriculture and manufacturing. We test whether the exchange rate pass-through to import prices is more complete in any particular sector and estimate the pass-through to consumer prices to investigate whether there is any linkage between the pass-through and the average inflation rate across these countries. The impulse responses indicate that exchange rates have less effect in the rising domestic prices in India. This will have important policy implication for the monetary authorities.

Keywords: Exchange rate pass-through (ERPT), structural VAR model, Australia, China and India, disaggregate data

----------------------*Corresponding author: Shrabani Saha, Phone: +61-8 -6304 2701; Fax: s.saha@ecu.edu.au 61-8 -6304 5271; Email:

Exchange Rate Pass-Through and its Impact on Inflation: A Comparative Study for Australia, China and India with Disaggregated Data

1. INTERDUCTION

Since the middle of the 20th century Australias primary trade partners have shifted from US/Europe to Asia. Natural and mining resources were, and continue to be exploited at increasing speeds, with economic expansion accelerating in the region. In recent years, consistent growth in demand from emerging economies most notably China and India, has driven up demand for Australian resources in the world market, and in turn increases the demand for the Australian dollar. 1 The Australian dollar (AUD) has started floating since December 1983 and as of August 2012, the AUD is the third most traded currency in the world. The high demand for Australian dollar pushes it up against all the major currencies since middle of 2008 and in December 2010 it reached parity with United States dollar (USD) first time and even now AUD continues to rise standing at 1.04 to the USD as of early September 2012. Such increase in exchange rate can generally be expected to impact various price levels including import, export, producer and consumer prices. In particular, in the context of low inflation and soft domestic demand in Australia and high inflation and high domestic demand in China and India attract renewed interest to evaluate the possible effects of recent exchange rate movements on inflation and trade in these countries. In assessing the likely consequences, it is vital to examine the nature of exchange rate pass-through in these three economies.

Recent years Australia has seen remarkable growth in the trading relationship between China and India. Australian merchandise trade with China and India increases by 16.4% in 2011 and 11% in 2010, respectively. Further strengthening and deepening this relationship Australia has been negotiating for Free Trade agreement with China and Comprehensive Economic Cooperation Agreement with India for future economic prosperity.

An important issue for exchange rate pass-through (ERPT) is the extent to which exchange rate changes affect the prices of imported and exported goods and the domestic consumer prices, which is of a major concern for monetary policy. In theory, ERPT refers to the transmission of changes in exchange rate into import (export) prices of specific goods in the destination market currency. The pass-through effects of exchange rate changes on import prices will contribute to the domestic inflation, while on the export prices will affect the price competitiveness, hence net exports and real activity. ERPT is said to be incomplete if the import (export) prices change by less than one. Whether ERPT is incomplete or pervasive, it is expected that an appreciation of the currency reduces import prices and the reverse ensues in case of depreciation (Tivig, 1996; Gagonon and Knetter, 1995; Varangis and Duncun, 1993; Krugman, 1987). Since the 1970s, there has been a huge number of studies to investigate the reasons why the degree of exchange rate pass-through is not equal to unity even in the long-run and why the degree of pass-through is different across-countries and over time (see, for instance, Bouakez and Rebei, 2008; Choudhri and Hakura. 2006; Campa and Goldberg, 2005; Bailliu and Fujii, 2004; Gagonon and Ihrig, 2001). The existing literature on incomplete pass-through has demonstrated that incomplete pass-through appears to be not only a common, but also a widespread phenomenon. Most of the existing theoretical and empirical studies have focused predominantly on large economies, particularly the USA, Japan and Germany, however, for relatively small economies such as Australia and the Asian economies, the empirical research is rather scanty. Traditionally it is believed that developing countries experience greater and more rapid pass-through of exchange rate changes than high-income countries. Recent study by Frankel et al. (2012) finds that the pass-through coefficients in poor countries declined significantly in the 1990s, and the downward trend among rich countries is much less and for

the CPI is not statistically significant. As a consequence, slow and incomplete pass-through is no longer exclusively a luxury of industrial countries. The degree of pass-through is an important issue in determining appropriate monetary policies of a country. A low ERPT provides greater freedom for pursuing an independent monetary policy and to make it easier to implement inflation targeting (Frankel et al., 2012; Choudhri and Hakura, 2006). Flamini (2007) and Adolfson (2007) also point out that that the characteristic of ERPT may affect the choice of the measure of inflation that the central bank should target, either inflation involving exclusively domestic products or total inflation including imports. The magnitude of the pass-through affects the various prices at different level of the production chain and is closely related to the ability of importers and producers to transfer their higher costs to consumers, which may eventually jeopardise price stability. However, most of the literature suggests that ERPT is essentially determined by microeconomic factors (e.g., demand elasticities, production cost, market structure etc.) and exogenous to macroeconomic policy (Devereux and Engel [2001]; Goldberg and Knetter [1995]). Taylor (2000) argues that the recently observed declines in the pass-through to aggregate prices are the result of a low inflation environment. In this view, the pass-through depends on the policy regime: a credible low inflation regime will automatically achieve a low pass-through. The recent empirical literature examines the relationship of the ERPT with monetary and inflationary behaviour. Campa and Goldberg (2005) investigate the relationship based on data for Organisation for Economic Co-operation and Development (OECD) countries and find that although higher inflation and exchange rate volatility are positively related with higher import price pass-through, microeconomic factors related to the composition of imports play a much more important role in determining the pass-through. It should be noted here that the

import price pass-through reflects the price behaviour of foreign firms and this behaviour may not be strongly related to the home inflationary environment. Thus evidence on the passthrough to domestic prices (e.g., consumer price index (CPI)) would provide a more appropriate test of the Taylor view. Gagonon and Ihrig (2001) explore the relationship between CPI pass-through and inflation stabilisation for eleven industrial countries but they do not find a systematic relation between the pass-through and the monetary behaviour. On the other hand, Nogueira and Le_on-Ledesma [2008] and Shintani et al. (2009) test the hypothesis in the context of nonlinear time-series models and find that inflation appears to drive smooth changes in ERPT regimes. These studies, however, focus on specific nonlinear functional forms and are thus more restrictive. This research presents a comparative study by exploring the literature relating pass-through for import, export as well as domestic prices in relatively small economy like Australia and two largely growing economies China and India for the period 1990-2011 by employing the vector autoregressive (VAR) techniques. The objectives of this study are to (i) test whether the exchange rate pass-through to import prices is complete, (ii) estimate the pass-through to CPI to investigate whether there is any association between the pass-through and the average inflation rate across these countries, (iii) we examines the pass-through in three major sectors, i.e. mining and natural resources, agriculture including processed product and manufacturing to compare the degree of pass-through across the sectors. This study is especially important for China and India given that these two economies have been experiencing a high inflation for a long period of time, and on the other hand, their currencies have been appreciating since 2005. Moreover, this study will pursue a comparative analysis with Australian economy where the main focus of monetary policy is inflation targeting. Based on the analysis we will be able to evaluate the role of monetary policies in

China and India and whether these countries require changing the monetary policy targets. Such a study will undoubtedly contribute to the available vast literature on ERPT relationship, and more importantly, to the debate between the US and China with regard to Chinese trade surplus against the US even when its currency is appreciating. The methodology used in this study is vector autoregressive (VAR) techniques, in which time-series behavior of the bi-lateral exchange rate and a set of prices are examined to assessing the responses of import, export, producer and consumer prices to exchange rate shock with a base line model. Specifically, the empirical analysis investigates the exchange rate pass-through in a set of prices along the distribution chain to assess producers business strategy. Second, the impulse-response functions (IRFs) from the VAR estimation are used to calibrate the key behavioural parameters that can help reproduce the pattern of pass-through and external adjustment in these three countries. The use of VAR model to examine exchange rate pass-through has some advantages over single equation methods. By investigating exchange rate pass-through into a set of prices along the distribution chain, the VAR model characterizes not only absolute but relative passthrough in upstream and downstream prices. Second, the VAR analysis potentially allows one to identify specific structural shocks affecting the system through Cholesky decomposition of innovations. The remaining part of the paper is organised as follows. Section 2 discusses the analytical framework and Sections 3 discusses data used in the analysis. empirical results. Section 5 provides some concluding remarks. Section 4 presents the

2. ANALYTICAL FRAMEWORK

The main focus of the analysis is to estimate the exchange rate pass-through for the prices of import and export in Australia, China and India using bilateral trade indexes. Along with import and export prices the main variables under consideration are producer prices and consumer prices. We first examine the pass-through of exchange rate and import price fluctuations to domestic producer and consumer prices across three countries using a standard VAR model specified in equation (1):

X t = + 1 X t 1 + 2 X t 2 + ...... + k X t k + t

(1)

where Xt denotes vector of endogenous variables, t is a vector of innovations that may be contemporaneously correlated but are uncorrelated with their own lagged values and uncorrelated with all right-hand side variables, is a vector of constants and are matrices of coefficients to be estimated. Identification of the structural shock is achieved by appropriately ordering the variables of interest and applying Cholesky decomposition to the variance matrix of the reduced form residuals t. The Choleski decomposition encompasses the decomposition of the variance covariance matrix of the reduced form residuals in a lower triangular matrix S. Thus the n(n1)/2 economic restrictions are imposed on the triangular matrix in order to identify the structural shocks where some of the structural shocks do not have contemporaneous impacts on other variables, where n denotes the number of endogenous variables. Following McCarthy [2000], Hahn [2003] and Ito and Sato [2008], we set up the baseline model with the vector of six endogenous variables, i.e., oil price inflation (oilp), interest rate (inrt), industrial output (ip), import price (impi), bi-lateral exchange rate (exr) and CPI (cpi) for each country, and specify the relationship between the reduced-form VAR residuals (t) and the structural shocks (t) of the model as follows:

 S11 toip inrt S 21 t ip S t = 31 timpi S exr 41 t S cpi 51 t S 61

0 S 22 S 32 S 42 S 52 S 62

0 0 S 33 S 43 S 53 S 63

0 0 0 S 44 S 54 S 64

0 0 0 0 S 55 S 65

0 0 0 0 0 S 66

toip inrt t tip impi t exr tcpi t

(2)

Variables ordered in the base model are to examine the identified shocks contemporaneously affect their corresponding variables and those variables that are ordered at a later stage, but have no impact on those that are ordered before. Oil price inflation and industrial output reflect real sector of the economy whereas interest rate is included to examine the impact of monetary policy. Oil price shock is ordered first because the reduced-form residuals of oil prices are unlikely affected contemporaneously by any other shocks except oil price shock itself, while it may affect the reduced form residuals of all equations and thus all variables in the system contemporaneously. 2 Monetary shock is captured by the change in interest rate and ordered next to allow for a contemporaneous impact of monetary policy shocks on the industrial output and the exchange rate. This ordering is also motivated by the observation that monetary policy shock would affect prices at different stages contemporaneously and is the main contributing factor to the domestic inflation. The output variable is ordered prior to the exchange rate and domestic prices to allow the exchange rate to respond contemporaneously to, among others, the demand shocks in the system. Following the

All the three economies have a high dependence on imported oil. With their rapid economic growth, energy demands in China and India are galloping. With China being the second-largest consumer and India the fourth largest consumer of oil in the world, Chinas oil dependence rate has reached 57.5% in 2011, and India's current dependency on foreign oil exceeds more than 75% which is expected to grow to 90% by 2025, according to UNESCAP. The increasing dependence on imported oil has made both economies highly vulnerable to external shocks. Australia is richly endowed with energy resources, having vast reserves of coal, national gap and uranium, but has only 3.9 billion barrels of proved oil reserves, or 0.2% of world total. According to the Australian Mines and Metals Association, Australia has only one decade of known oil resources at current production rate. Australian refineries were almost entirely dependent on imported oil. Australias growing dependency on imported oil, and easily disrupted or fractured supply chains, is an increasing economic and strategic vulnerability.

literature, we place the domestic prices at the bottom of the VAR ordering with the assumption that the price variable is contemporaneously affected by all other shocks while the price shock has no contemporaneous impact on the other variables (see Hahn [2003]). Since exchange rate and domestic prices variables are the main focus of the analysis, we employ and order different price variables in the VAR model according to the distribution chain to assess the pass-through effect of the exchange rate change in the empirical analysis. In the second step, we repeat the same procedure for three different sectors i.e., mining, agriculture and manufacturing. Finally, we replace the export price in place of import price to examine the pass-through effect of exchange rate. 3. DATA We use in this study the unit values of bilateral exports and imports between the concerned economies as proxies for the bilateral import and export prices of the three ecoonmies. All data are monthly, collected from Directorate General of Commercial Intelligence and Statistics, Government of India, and Australian Bureau of Statistics. For each country monthly data for industrial production, producer price, consumer price, exchange rate and interest rate is collected respectively from IMF: International Financial Statistics, Bank of International Settlements, and Reserve Bank of Australia covering the period from 1990:01 until 2011:03. The oil price is obtained from Datastream in terms of the US dollar. For the purpose of study the bi-lateral exchange rates are calculated from the nominal exchange rate defined as units of foreign currency per U.S. dollar. All data are monthly, and are expressed in natural logarithms. In order to assess the time series properties of the data, we conduct not only the standard but also seasonal unit root tests. As a standard unit root test we applied both the AugmentedDicky-Fuller (ADF) and Phillips Perron (PP) tests for unit roots. In addition, we conducted

the HEGY tests for unit roots at seasonal frequencies. Table 1 reports the results for the standard unit root tests. We select the lag length following Akaike Information Criteria (AIC). We also report the results with the first-differenced series to confirm that all the variables under investigation are I(1). Regression equation for unit root test includes both intercept and trend. From Table 1, we can infer that except CPI for Australia and PPI for India all variables in levels are non-stationary. The HEGY seasonal unit root tests confirm these results and further indicate that we can reject unit roots at the 5% level at all the seasonal frequencies with the exception of zero frequency (Table 2). Given these properties of the data, VAR model in the first differences of the non-stationary variables considers as an appropriate specification of the models. [Insert Tables 1 and 2 about here] 4. RESULTS 4.1. Import price pass-through

As discussed in Section 3, the model is estimated using structural VAR estimation technique consisting of seven variables i.e. oil price inflation, interest rate, industrial output, exchange rate, import price, PPI and CPI. The VAR model estimates the degree of pass-through from the exchange rate shock to the three price variables, namely, import price (impi), producer price index (ppi), and consumer price index (cpi) for three different sectors (mining and natural resources, agriculture and processed product and manufacturing sector) in each economy. We first examine the impulse responses of the price variables due to exchange rate shock and then estimate the variance decomposition of the variables under examination.

Impulse response In this subsection we estimate the VAR model specified previously and examine the degree of pass-through from the exchange rate shock to the three price variables, namely, import price (for three different sectors i.e. imp1, imp2 and imp3), producer price index (ppi) and consumer price index (cpi) in each economy at bi-lateral level, i.e. Australia-China, IndiaAustralia and China-India. 3 The lag order of the VAR model is selected based on the Akaike information criterion (AIC).We first estimate the baseline models, and then analyse the impulse response functions of a variable in response to the shock over a period of 20 months. As the bi-lateral exchange rate is used for each bi-lateral trade countries and is defined indirectly as number of units of the second currency equivalent to the one unit of the first currency, 4 an increase in the exchange rate implies an appreciation of the first currency and depreciation of the second country concerned. Figure 2 plots the exchange rate shocks and its impact on the variables estimated by imposing long-run restrictions on the structural VAR model. The exchange rate shock is standardized to 1% shocks. The vertical axis in Figure 1 reports the approximate percentage change in the variables in response to one standard deviation innovation. The solid line in each graph is the estimated response while the dotted lines denote a one standard deviation confidence band around the estimate. As it can be seen from Figure 1, in contrast to the case of China and India, the response of import prices in Australia to the exchange rate shock is negative except for the agricultural sectors in the initial months suggesting that an appreciation of the AUD decreases the import price in all three sectors which is consistent with the theory of trade. However, import prices in India and China shows both positive and negative effects over the 20 months time and the
Australia-China bi-lateral relationship for example, is defined as Australias export to China and import from China. Due to data limitation, we dont differentiate any possible re-exports via Hong Kong from Chinas total exports to Australia and India. 4 For example, Australia-China exchange rate is defined as one unit of Australian dollar equivalent to number of units of Chinese remninbi.
3

large negative effects in the initial months can be seen for manufacturing sector in India and for mining and natural resources sector in China. For China, agriculture sector does not show a strong response to the exchange rate shocks. On the other hand, CPI shows a large positive response in Australia and the response increases over time, which indicates that the exchange rate does matter for domestic inflation in Australia. In other words, an increase in Australian dollar decreases the import price but increases the domestic prices, which is quite conflicting. In contrast, the response of CPI is quite small in India, CPI increases initially in response to an increase in Indian rupee, however, the effect dies out after 10 months. The result indicates that exchange rate variation does not cause domestic price variation. In China, the impact on CPI is nil in the initial two months and after that the CPI decreases and the negative response increases over time. In Australia, PPI shows a large negative response in the first instance, but the effect dies out slowly overtime. However, for China, PPI remains stable in the initial two months and then starts decreasing at an increasing rate. But PPI shows a very large response compare to IMP and CPI and the large responses remain over time. Overall, PPI shows large response to exchange rate shock in all the three economies and followed by CPI. [Insert Figure 1 about here]
The pass-through to import price is the highest in Australia for all three sectors, exceeding 5% for the mining and natural resources sector, followed by agriculture and processing and the least effect is in manufacturing sector. On the other hand, the maximum response in India and China is in manufacturing and mining and natural resources sector, respectively. The degree of the pass-through to CPI and PPI is greater than that to import price in Australia and China. Moreover, the degree of pass-through to CPI is greater in Australia than China, it may be that Australias consumption baskets contain more tradable components. The pass-through is relatively small in India than China. Our

finding confirms that the level of pass-through is high in country with high nominal exchange rate variability.

In order to estimate the dynamic ERPT elasticity or coefficient from the impulse response function, we divide the cumulative change in each price variable by the cumulative change in the exchange rate shock across the specified time horizon, which can be defined as:
T T

PTt ,t + j = Pt ,t + j / ERt ,t + j
j =1 j =1

Where Pt,t+j denotes the impulse response of the price change to the exchange rate shock after j months and ERt,t+j stands for the corresponding impulse response of the exchange rate change. The dynamic ERPT coefficient, PTt,t+j , represents the predicted adjustment of prices after j months to the initial exchange rate shock normalized by the corresponding responses of the exchange rate change. Table 3 reports the dynamic ERPT elasticities for the price variables in these three economies. Given the indirect quotation of the exchange rate, negative pass-through implies that devaluation of the home currency will lead to an increase in the prices. [Insert Table 3 about here] As it can be seen in Table 3, exchange rate pass-through in trade prices and PPI as well as CPI is incomplete though varying across the three economies, particularly in the short run. The degree of the pass-through elasticities of IMP are the largest and closer to unity about a year late. Pass-through in consumer prices is the smallest. The industry level data show similar results. In particular, for all the three countries, pass-through to the trade prices is the largest in the mining and manufacturing industries and least in the agricultural sector, and pass-through to the domestic prices is similar in all the three sectors. Our findings are consistent with the expectation that ERPT to prices diminishes along the distribution chain,

and is also industry based, a reflection of different business strategie across sectors. We also find evidence that exchange rate shock contributes to domestic inflation. 4.2. Export price pass-through

Figure 1 shows the impulse response for the export prices as well in all three economies. Figure 1(a) shows that export price for mining and natural resources decreases initially after two months it has positive effect suggesting that exchange rate shock increases the export price for the mining product. However, the export price for agriculture and manufacturing sector initially have positive effect but the effects become negative over time. On the other hand, in India, all three sectors show positive effect in the beginning but it became negative over time. In China manufacturing sector shows large positive effect after 5 months and the positive effect increases over time. However, mining and agriculture sectors responses are negative throughout. Overall, the greater impact in terms of export price is in Australia compare to China and India. The degree of the dynamic ERPT elasticities of export prices is also found to be the largest and closer to unity about a year late across the countries, which provides further support. [Insert Figure 1 about here]

Variance Decomposition We now turn to a variance decomposition analysis. Variance decompositions examine the fluctuations of each price variables that are due to the exchange rate shocks or other factors. Table 4 displays the results for all baseline variables at 5 months intervals up to 20 months. It is found that the bulk of the movements in oil price, interest rate, industrial output, exchange rate and CPI were explained by the importance of composite shocks to their own shocks. For

import prices, exchange rate and domestic price shocks are the next important factor in explaining import price variance in Australia for mining and natural resources, where the share changes from 0.74% to 1.33% for the former and from 0.54% to1,52% for the latter (Table 4). In india, the domestic prices and production are the next important factor in accounting for the variance of IMP, in addition to its own shocks. The exchange rate shocks account for about 3.05% of import price variance in the manufacturing in India. It is interesting to note that in China, the variance of import prices is largely explained by the IMP shock originated from the mining and energy sector, which accounts for around 50% of the variance in all the three industries. This finding is consistent with our early discussion of Chinas high dependency on the imported mining and energy products from the world. The impact of the exchange rate shocks on the import price is not strong. [Insert Table 4 about here] The results show that the variances of CPI and PPI in Australia are mainly explained by its own (CPI and PPI) shock, followed by the exchange rate shock and import price shock. The exchange rate shock accounts for about 5% of the variance of CPI in the short run and 7.5% in the long run, In India, the variance of CPI is mainly explained by its own (CPI) shock, over 80% in the first 5 months. The exchange rate shock and PPI account for less than 55 of the variance. However, the exchange rate shock contributes over 32% of the PPI variance in the long run. In China, the variance of its CPI is equally explained by its own and IP shocks, each accounting for a share of about 50% in long run. The variance of PPI is explained by its own shock and IP as well as CPI and oil price, with IP accounting for close to 30% of the variance in PPI, and CPI and oil price around 10%. The variance decompositions thus suggest that external factors explain the modest portion of the variance of domestic consumer prices in Australia, and Australias CPI inflation was

mainly caused by the import price and the exchange rate pass-through. Whereas, the effect is opposite in China and India where internal factors like PPI and industrial output account for moderate variation in CPI. This finding is consistent with our casual observation that the external factors tend to have greater influence in more open economy like Australia than in India and China.

5.

Conclusion

This paper examines the pass-through of exchange rate into import prices, producer prices and consumer prices for three selected economies including Australia, China and India by employing industry-level data. Using a structural VAR model that incorporate distribution chain, we find that pass-through of exchange rate to aggregate consumer prices is greater in Australia than in China and India, however depreciation of Australian dollar increases import prices and consumer prices. On the other hand, depreciation of Chinese renminbi and Indian rupee decrease the import price but it has inflationary effect on domestic prices over the period 1990-2011. However, the external factors account for a little variation in domestic prices in these two countries. In contrast, internal factors like industrial production, interest rate and producer prices are found to be effective on domestic consumer prices. The results have important implications for monetary policy in China and India. Decreases in import prices are unable to exert an influence on domestic inflation and hence less effective in controlling the inflation level in these two countries. Much of the inflation during the period of study is likely due to internal factors. Thus, attention in these economies should be

given on revisiting the monetary policy target and how it can be restructured to control inflation.

References

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Tables: Table 1: Unit root test

Variable Australia Lag 0 Panel A: Augmented Dickey Fuller Country India Test-Stat Lag Test-Stat -16.04960 1 -7.761384

Import Price Mining and natural resources Import Price Mining and natural resources Import Price Agriculture and processed product Import Price Agriculture and processed product Import Price Manufacturing Import Price Manufacturing Export Price Mining and natural resources Export Price Mining and natural resources Export Price Agriculture and processed product Export Price Agriculture and processed product Export Price Manufacturing Export Price Manufacturing CPI CPI Oilprice Oilprice PPI PPI Interest Interest Industrial Output Industrial Output Aus-Chn ER Aus-Chn ER Aus-Ind ER Aus-Ind ER Chn-Ind ER Chn-Ind ER

China Lag 12

Test-Stat -5.064246

-11.68837

-10.41100

11

-7.89595

-4.550816

-3.885534

-3.038236

3 13.32613 2 2 0

-14.61790

-13.76888

-5.711333 -16.33785 -15.38773

0 6 0

-13.81545 -11.40391 -7.023626

13 12 3

-6.421005 -5.012445 -3.022366

11

-9.801827

-15.76352

11

-7.766994

-16.68549

-3.317360

-12.81575

-13.75956

-15.51379

-12.99648

1 1 7 6 0 9 1 2 2 2 1 2 1 0 1 0

-5.417154 -16.27285 -0.967904 -5.009387 -13.68154 -10.36772 -7.337941 -14.10813 -3.993159 -6.896438 -4.399159 -16.53792 -2.257469 -12.74005 -0.643626 -12.62835

3 9 12 11 0 9 1 0 3 2 13 12

-3.471017 -7.420687 -0.057491 -2.528475 -13.68154 -10.36772 -0.571361 -11.66956 -1.830740 -11.69381 -1.043736 -3.608152

9 8 12 11 0 9 1 0 0 0 3 2 1 0

0.216200 -9.023981 -1.905688 -4.671806 -13.74835 -10.36603 -4.223539 -5.910421 -1.477202 -14.58504 -3.791371 -14.02721 -2.517071 -12.71669

1 0

-2.717418 -12.61008 0 0 -2.229027 -13.87131

Import Price Mining and natural resources Import Price Mining and natural resources Import Price Agriculture and processed product Import Price Agriculture and processed product Import Price Manufacturing Import Price Manufacturing Export Price Mining and natural resources Export Price Mining and natural resources Export Price Agriculture and processed product Export Price Agriculture and processed product Export Price Manufacturing Export Price Manufacturing CPI CPI Oilprice Oilprice PPI PPI Interest Interest Aus-Chn ER Aus-Chn ER Aus-Ind ER Aus-Ind ER Chn-Ind ER Chn-Ind ER

Australia Bandwidth 1

PANEL B: Phillips-Perron test statistic India Test-Stat Bandwidth Test-Stat -16.04956 5 -13.95957

China Bandwidth 4

Test-Stat -3.692995

43

-105.3472

56

-98.28894

-16.12462

-13.26806

10

-11.82276

-3.174099

25

-63.57073

33

-71.30065

-13.76832

10 10 6

-12.14113 -34.19651 -15.53488

2 39 5

-13.81717 -73.46150 -7.022370

6 5 10

-3.236754 -8.398834 -10.04325

51

-85.95189

22

-30.33449

28

-62.85980

-16.71577

-3.514836

-13.46409

51

-124.2351

-15.51379

71

-130.5654

9 18 8 4 8 251 8 42 10 10 2 5 6

-9.594719 -46.13976 -0.553178 -10.48782 -13.52149 -190.5543 -12.54639 -76.79331 -4.479954 -15.63895 -2.058649 -11.61278 -1.511533

6 4 0 1 8 250 5 3 11 15 6 9 5

-3.424007 -8.807071 2.099913 -11.58884 -13.49377 -198.1963 -0.212022 -11.80838 -1.935663 -14.84364 -3.819715 -15.33754 -1.784738

11 42 8 4 8 255 8 1 7 5 1 1 2 5 3

-5.371423 -18.90422 -1.730686 -11.53683 -13.58325 -189.8853 -3.506066 -5.999566 -1.833389 -14.66429 -3.334297 -17.37300 -1.635438 -2.605663 -13.86252

Table 2: HEGY test results Australia Variables Import Price Mining and natural resources Import Price Agriculture Import Price Manufacturing and processed product CPI Oilprice PPI Interest Aus-Chn ER 1 2 F-Statistics (p-value) 3=4 11.37(0) -2.011 -2.099 -3.521 -2.62 11.825(0) 8.138(0) -3.517 4.714 -4.515 -1.793 4.851 2.977 -1.927 -3.928 -3.186 -3.227 -4.349 -3.646 11.005(0) 13.302(0) 9.808(0) 26.06(0) 16.03(0) 1.627(0.199) 8.956(0) 9.771(0) 9.815(0) 10.075(0) 15.11(0) 10.016(0) 11.94(0) 13.71(0) 9.3(0) 15.398(0) 8.092(0) 7.659(0.001) 10.295(0) 5.274(0.006) 9.882(0) 16.189(0) 13.029(0) 5.036(0.007) 18.551(0) 17.019(0) 7.537(0.001) 23.65(0) 16.1(0) 7.639(0.001) 8.142(0) 5.813(0.004) 12.897(0) 14.141(0) 13.909(0) 13.377(0) 11.654(0) 5=6 7=8 9=10 11=12

India Variables Import Price Mining and natural resources Import Price Agriculture Import Price Manufacturing and processed product CPI Oilprice PPI Interest Aus-Ind ER 1 2

F-Statistics (p-value) 3=4 5=6 7=8 9=10 11=12

-1.862 -0.33

-1.766 -2.771

4.42(0.014) 4.265(0.016)

4.566(0.012) 7.623(0.001)

4.231(0.017) 8.161(0.001)

3.046(0.051) 5.708(0.004)

5.126(0.007) 5.83(0.004)

-2.03 2.053 -4.568 3.191 1.746 3.983

-2.289 -2.061 -3.042 -3.155 -4.158 -3.054

9.846(0) 14.072(0) 13.631(0) 8.627(0) 9.737(0) 17.165(0)

18.718(0) 4.34(0.014) 9.528(0) 7.047(0.001) 15.701(0) 17.973(0)

9.847(0) 8.753(0) 12.866(0) 5.907(0.003) 8.006(0.001) 12.533(0)

13.093(0) 10.118(0) 5.668(0.004) 7.763(0.001) 15.991(0) 14.183(0)

7.595(0.001) 11.245(0) 16.498(0) 12.739(0) 10.754(0) 23.567(0)

China Variables Import Price Mining and natural resources Import Price Agriculture Import Price Manufacturing and processed product CPI Oilprice PPI Interest Chn-Ind ER 1 2

F-Statistics (p-value) 3=4 5=6 7=8 9=10 11=12

-4.734 -0.967

-2.775 -2.915

10.339(0) 7.905(0.001)

11.071(0) 11.951(0)

12.564(0) 23.06(0)

9.789(0) 7.077(0.001)

12.31(0) 43.077(0)

-3.343 4.806 -4.515 4.929 4.035 2.848

-3.559 -4.058 -3.186 -2.815 -3.626 -3.583

10.494(0) 22.52(0) 13.302(0) 18.618(0) 12.124(0) 9.388(0)

6.291(0.003) 20.071(0) 9.771(0) 11.71(0) 11.272(0) 16.341(0)

18.778(0) 13.72(0) 13.71(0) 16.69(0) 11.364(0) 7.988(0.001)

16.976(0) 20.912(0) 5.274(0.006) 7.097(0.001) 11.722(0) 17.467(0)

11.279(0) 29.084(0) 17.019(0) 28.748(0) 21.191(0) 18.524(0)

Table 3: Dynamic ERPT

AU-CH AEX/Exchange rate PPI /Exchange rate CPI /Exchange rate AIMP/Exchange rate CH-IN PPI /Exchange rate CPI /Exchange rate AIMP/Exchange rate AEX/Exchange rate IN-AU PPI /Exchange rate CPI /Exchange rate AIMP/Exchange rate Elasticities AEX/Exchange rate

1 0 0 0 0 1 0 0 0 0 1 0 0 0 0

5 -0.886 -1.976 0.154 0.3 5 -0.577 -0.364 1.276 -5.701 5 0.241 0.096 -0.026 -0.038

10 -0.918 -2.029 0.277 -0.348 10 -1.623 -0.789 1.07 2.832 10 0.419 0.104 -0.008 -0.554

15 -1.098 -2.026 0.387 -0.606 15 -2.064 -0.99 0.837 6.449 15 0.58 0.088 0.008 -1.021

20 -1.276 -2.015 0.516 -0.73 20 -2.199 -1.099 0.729 8.483 20 0.727 0.07 0.022 -1.316

Note: the ERPT coefficients using disaggregated data are available upon request.

Table 4: Variance Decomposition: Australia-China Period AUS_CHN_ER 1 5 10 15 20 1 5 CPI 10 15 20 1 5 PPI 10 15 20 1 OILPRICE 5 10 15 20 1 INTEREST 5 10 15 20 INDPI 1 5 S.E. 0.194894 0.483202 0.629843 0.708989 0.757016 0.246265 0.871844 1.423738 1.858424 2.239819 6.025035 6.677386 7.014925 7.255689 7.433073 0.095595 0.101151 0.101177 0.101179 0.10118 0.250463 0.562525 0.801607 0.966145 1.0827 1.489269 2.244769 AUS_CHN_ER 100 97.57683 92.58051 86.60594 81.30742 1.831913 4.304774 5.608328 6.56604 7.535131 0.01784 2.078346 2.71163 2.855434 2.809098 1.110683 7.531916 7.54612 7.547751 7.547945 0.23083 10.99169 24.06255 34.74355 42.85787 0.025602 0.491721 CPI 0 0.518824 0.657687 0.620329 0.556015 98.16809 81.48011 74.09495 70.32778 67.4966 0.600917 1.763028 2.681605 3.567888 4.416625 5.782699 5.393315 5.396036 5.395997 5.395897 2.985355 6.047064 4.906882 3.778179 3.06558 0.019752 0.877999 PPI 0 0.272146 0.61959 0.949508 1.190048 0 0.921275 1.939259 2.467352 2.776324 99.38124 89.02185 81.39764 76.45415 73.11729 0.001 0.234381 0.237063 0.237104 0.237161 0.111478 0.729867 1.097207 1.028256 0.88027 0.124388 1.131485 OILPRICE 0 0.44838 0.690775 0.809695 0.854386 0 4.568772 5.718769 6.034328 6.125671 0 1.763933 2.006435 2.142902 2.25679 93.10562 84.18907 84.14612 84.14309 84.1415 0.238432 0.895655 0.931278 0.746526 0.603935 0.153639 0.530552 INTEREST 0 0.083259 0.733456 1.737597 2.616666 0 1.088981 2.008717 2.909363 3.669392 0 0.155886 0.574725 0.879444 1.079092 0 0.143359 0.145229 0.146522 0.14776 96.4339 80.39545 67.93827 58.73214 51.77997 2.80741 6.519242 INDPI 0 1.031941 4.582285 9.059025 13.18162 0 0.023089 0.340825 0.975231 1.679042 0 3.858516 9.010007 12.34115 14.42465 0 0.150999 0.151234 0.151264 0.151508 0 0.160618 0.327554 0.36933 0.306187 96.86921 89.75443 IMP1 0 0.042854 0.037934 0.033397 0.029542 0 6.433044 9.56677 10.14856 10.2172 0 0.147255 0.302737 0.460619 0.616137 0 0.336789 0.34026 0.340326 0.340321 0 0.166533 0.268919 0.229946 0.190311 0 0.164872 IMP2 0 0.010074 0.044483 0.090301 0.135249 0 0.863094 0.498695 0.35837 0.282565 0 1.185053 1.242855 1.189476 1.146716 0 1.776953 1.791915 1.791923 1.791889 0 0.407485 0.270933 0.201779 0.170434 0 0.07665 IMP3 0 0.015692 0.053277 0.094208 0.129051 0 0.31686 0.223692 0.212974 0.21807 0 0.026135 0.072369 0.108937 0.133602 0 0.243213 0.246027 0.24602 0.246022 0 0.205639 0.196407 0.170285 0.145437 0 0.453052

10 15 20 1 IMP1 5 10 15 20 1 IMP2 5 10 15 20 1 IMP3 5 10 15 20

2.658172 2.84514 2.942401 0.738975 0.770622 0.772265 0.77336 0.77417 0.097255 0.104685 0.106082 0.106794 0.107255 49.28681 53.30216 53.63906 53.78662 53.84859

1.017925 1.261467 1.327961 0.739162 0.967807 1.167883 1.27915 1.334162 0.364782 0.446387 0.589311 0.820002 1.092803 0.002834 0.010322 0.090157 0.156077 0.186127

1.520355 2.180011 3.004125 0.548231 1.456352 1.490963 1.506313 1.520632 0.01278 1.224204 1.358557 1.397684 1.421416 0.065817 0.074835 0.110083 0.167845 0.22926

1.928274 2.225719 2.36853 0.057526 0.396854 0.43029 0.440021 0.448137 0.330572 1.632931 1.666069 1.656532 1.646371 0.011833 0.022433 0.035705 0.04134 0.041595

0.783499 0.923696 1.042964 0.291481 0.398371 0.413554 0.420192 0.425653 2.206091 2.8569 2.783567 2.746558 2.723126 0.026873 0.143079 0.141358 0.141763 0.145072

6.02105 5.495568 5.16063 0.157286 0.197106 0.198405 0.203614 0.210607 0.286146 0.64933 0.644664 0.675241 0.727842 0.599498 1.112736 1.26141 1.282899 1.281153

87.6668 86.63114 85.62298 0.152149 0.181853 0.284462 0.402379 0.508302 2.89E-05 2.100942 4.000107 4.896622 5.318205 0.00074 1.700278 2.626987 2.986022 3.100301

0.326941 0.478658 0.650287 98.05417 92.20339 91.82686 91.57041 91.38149 0.000557 0.565505 0.620917 0.621026 0.619948 0.725663 2.07468 2.051198 2.047156 2.050845

0.220207 0.275276 0.290745 0 3.862608 3.852765 3.843016 3.835792 96.79904 90.32817 88.13537 86.98422 86.24873 0.062309 1.170084 1.159073 1.157977 1.158084

0.514944 0.528468 0.531778 0 0.335655 0.334814 0.334906 0.335223 0 0.195636 0.201439 0.202115 0.201558 98.50443 93.69155 92.52403 92.01892 91.80756

(b) Variance Decomposition: India-Australia Period AUS_IND_ER 1 5 10 15 20 1 5 CPI 10 15 20 1 5 PPI 10 15 20 1 OILPRICE 5 10 15 20 1 INTEREST 5 10 15 20 IP 1 5 S.E. 0.777641 1.859316 2.249318 2.41882 2.533875 0.719386 2.102108 3.111335 3.938069 4.692612 0.555343 1.525606 2.191266 2.734883 3.215134 0.094699 0.101498 0.101754 0.101855 0.101946 0.251624 0.585138 0.7934 0.920998 1.006032 4.224124 5.854301 AUS_IND_ER 100 93.05037 89.05653 84.93563 80.64878 0.477691 4.681299 4.89079 4.615366 4.501443 2.781673 21.75313 29.83529 32.23351 32.15658 2.949721 9.430287 9.390361 9.39024 9.412738 3.245433 5.58427 5.753938 5.75428 5.75643 0.180851 0.290356 CPI 0 0.233127 1.348578 2.905766 4.731952 99.52231 83.00505 79.82528 77.75212 75.75082 14.28635 6.34841 5.949516 7.745747 10.96705 0.697094 1.590146 1.612566 1.675372 1.752451 0.183421 3.394412 2.724655 2.146924 1.808843 0.17789 1.055447 PPI 0 0.274952 0.334651 0.315638 0.29009 0 5.508517 4.972166 4.290959 3.718621 82.93198 63.05217 45.11977 34.09661 27.13415 6.496209 6.764835 6.905187 6.930251 6.925117 5.167349 4.464401 4.885021 5.384126 5.827326 0.23096 3.984933 OILPRICE 0 0.027334 0.036582 0.069682 0.118583 0 3.205997 3.688138 3.626635 3.496135 0 1.66058 1.465641 1.314493 1.286865 89.85698 79.23827 78.84927 78.69312 78.55389 0.050994 0.029001 0.01999 0.034703 0.064999 0.416289 0.918051 INTEREST 0 0.145299 0.830914 1.870687 2.959321 0 0.139325 0.310598 0.887001 1.633937 0 0.001512 0.001403 0.001688 0.016497 0 0.366634 0.487655 0.548432 0.577167 91.3528 80.8831 78.8966 78.26785 77.87442 0.284599 2.198169 IP 0 0.09979 0.810055 1.995415 3.240603 0 0.482316 2.003924 3.758069 5.317993 0 6.145895 14.93496 20.61618 23.69393 0 0.313541 0.361359 0.362702 0.373755 0 0.559271 1.148717 1.620971 1.926345 98.70941 86.98018 IMP1 0 0.048539 0.038808 0.075198 0.160504 0 2.24535 2.909553 3.067105 3.132588 0 0.397408 0.209338 0.16792 0.130284 0 0.538405 0.608388 0.612195 0.61155 0 4.707503 5.619617 5.532231 5.315919 0 0.800909 IMP2 0 0.192251 0.778374 1.283779 1.670141 0 0.280125 1.058669 1.701312 2.182962 0 0.11464 0.616807 1.395245 2.102139 0 0.369071 0.392505 0.395769 0.395231 0 0.376247 0.926104 1.202088 1.332095 0 2.654323 IMP3 0 5.928344 6.765507 6.5482 6.180026 0 0.452021 0.340883 0.301431 0.265501 0 0.526254 1.867279 2.428598 2.512511 0 1.38881 1.392704 1.391924 1.398098 0 0.001797 0.025363 0.056829 0.09362 0 1.117636

10 15 20 1 IMP1 5 10 15 20 1 IMP2 5 10 15 20 1 IMP3 5 10 15 20

6.623948 7.144408 7.626587 0.367338 0.384906 0.390065 0.39259 0.39426 0.252124 0.291417 0.305672 0.310599 0.312631 1.474153 1.514275 1.52718 1.53573 1.542485

1.29592 2.435106 3.311019 0.068707 0.437494 0.576024 0.575892 0.607117 0.164227 0.331814 0.505165 0.497153 0.509679 1.662288 2.882119 2.923842 2.943962 3.052067

3.936475 8.511982 13.66013 0.753724 1.78589 2.750527 3.427648 3.907034 0.109404 0.53543 1.752946 2.49383 2.851718 0.352212 0.668426 1.30597 1.775504 2.072826

3.547341 3.060857 2.734044 0.59847 0.974785 0.950623 0.938852 0.931883 0.013724 0.383203 0.60887 0.642126 0.636592 1.479343 1.767819 1.935345 1.991616 2.017088

0.738794 0.752124 0.862676 0.016252 0.248071 0.288756 0.320558 0.34083 0.274516 1.419663 1.49182 1.521959 1.529014 1.072694 2.007341 1.985425 1.977229 1.969398

2.470092 2.660194 2.888233 0.371781 0.438454 0.48722 0.483589 0.500172 0.001447 0.375833 0.356081 0.436137 0.59907 0.079739 0.155225 0.176732 0.181975 0.212541

82.02833 76.18398 70.02306 0.008611 1.988167 3.090863 3.427965 3.527208 1.953085 8.505863 12.65828 13.76958 14.00096 0.598833 1.989476 2.603566 2.927888 3.109442

0.811567 0.711871 0.727942 98.18246 92.92314 90.64119 89.58444 88.90999 0.575035 2.50259 3.164927 3.475056 3.63234 0.000101 0.289974 0.333689 0.404838 0.474603

4.0194 4.600378 4.818743 0 1.140287 1.122838 1.111385 1.102163 96.90856 85.88939 79.31145 76.92613 75.94395 0.016467 0.049554 0.049935 0.050133 0.050833

1.152082 1.083503 0.974153 0 0.063708 0.091964 0.129667 0.173602 0 0.056215 0.15046 0.238033 0.296678 94.73832 90.19007 88.6855 87.74686 87.0412

(c) Variance Decomposition China-India Period CHI_IND_ER 1 5 10 15 20 1 5 CPI 10 15 20 1 5 PPI 10 15 20 1 OILPRICE 5 10 15 20 1 INTEREST 5 10 15 20 S.E. 0.08705 0.250714 0.35964 0.43079 0.480664 0.556232 1.403689 2.009839 2.36658 2.576486 0.595779 2.439568 3.401099 3.788405 3.986615 0.09355 0.103 0.104412 0.104772 0.104868 0.23069 0.462372 0.63924 0.783121 0.903939 CHI_IND_ER 100 95.07755 89.87563 85.23697 81.72673 1.326635 3.574128 6.974141 8.535111 9.337367 0.20589 1.068511 4.922133 7.788454 9.110768 2.443477 3.696073 3.781433 3.770631 3.769004 0.125794 4.740466 8.117678 9.848646 10.63528 CPI 0 0.174727 1.454349 3.172668 4.688667 98.67336 64.71282 49.56525 41.84716 37.2568 1.814317 10.19119 16.18012 16.25298 14.92305 3.881506 3.701944 3.65869 3.803387 3.87169 1.044376 1.627085 1.461055 2.363362 3.240105 PPI 0 0.108305 0.215864 0.200641 0.169658 0 0.758432 0.460427 0.420742 0.364278 97.97979 65.48355 43.94836 35.56106 32.1722 0.50662 1.019021 2.586236 2.700546 2.728523 0.130412 0.217729 0.274395 0.898649 1.159976 OILPRICE 0 0.381794 0.642835 0.735552 0.733543 0 0.486362 0.43865 0.344702 0.311406 0 11.26889 9.984905 8.15474 7.524643 93.1684 77.91292 76.26948 75.85625 75.72093 0.894954 0.452614 0.372626 0.264403 0.228185 INTEREST 0 1.241276 2.248428 3.356958 4.570874 0 0.294716 0.163185 0.144896 0.201845 0 0.372513 1.402952 2.250716 2.753919 0 0.195308 0.217052 0.216035 0.216398 97.80446 90.74008 81.89359 71.93558 63.72311 IP 0 1.473489 2.048582 1.897137 1.630215 0 28.24898 40.83848 46.47828 48.84954 0 7.483837 18.83603 24.64573 26.0312 0 4.633398 4.535177 4.548961 4.600169 0 1.036873 6.518095 13.00067 18.77272 IMP1 0 0.504945 1.859983 3.14238 3.881897 0 0.732275 0.650464 1.153966 2.065041 0 3.682795 3.567484 3.566671 4.697733 0 1.636528 1.832799 1.96937 1.969191 0 0.857621 0.806265 1.234351 1.851866 IMP2 0 0.924393 0.949419 1.052859 1.161855 0 0.052135 0.138934 0.115183 0.107663 0 0.27049 0.850426 0.880644 0.876156 0 6.456023 6.297029 6.259924 6.249409 0 0.043822 0.028295 0.050692 0.074507 IMP3 0 0.113519 0.704905 1.204834 1.436561 0 1.14015 0.770472 0.959964 1.506057 0 0.178221 0.307582 0.898999 1.910333 0 0.748789 0.822101 0.874897 0.874688 0 0.283708 0.528006 0.40365 0.314251

1 5 IP 10 15 20 1 IMP1 5 10 15 20 1 IMP2 5 10 15 20 1 IMP3 5 10 15 20

2.922172 3.522173 3.777436 3.899299 3.947954 0.515482 1.068372 1.297988 1.342779 1.354373 0.251291 0.527545 0.640532 0.662985 0.669779 3.424496 11.35091 13.97404 14.47395 14.59925

0.01207 4.570423 5.533947 5.705873 5.8037 0.67666 0.400534 0.365899 0.345389 0.353382 0.021867 0.365789 0.290565 0.278179 0.273432 0.172598 0.489402 0.444266 0.421474 0.433064

2.75279 2.86768 3.347109 3.215848 3.1445 0.18555 0.295954 1.150112 1.650374 2.035741 0.001458 0.261955 1.503832 2.399727 3.07946 0.01159 0.360877 1.256461 1.67021 1.99987

7.993034 7.808768 6.825491 6.425145 6.372606 0.275104 0.718663 2.602152 3.169756 3.16041 0.351023 1.147563 2.737165 3.176297 3.148278 0.224417 0.463983 2.923921 3.630527 3.614806

0.342499 3.478111 3.081885 2.944365 2.873773 2.258129 1.316867 0.975957 0.982067 0.967157 1.168537 0.948302 0.708815 0.702371 0.689973 1.473111 1.491026 1.09834 1.130294 1.113703

0.275792 0.299036 0.55213 0.80504 1.04191 0.084236 0.096217 0.133084 0.148134 0.160922 0.017583 0.016347 0.069365 0.106693 0.148713 0.008866 0.060919 0.120371 0.131472 0.138794

88.62381 78.71811 76.49672 74.59776 73.55648 0.162473 5.778285 9.076307 9.451431 9.335705 0.293397 3.692058 6.358041 6.477236 6.377694 1.249983 7.649137 10.71094 11.1089 10.98655

0 0.348143 1.471175 2.756983 3.226039 96.35785 57.95618 53.06804 51.77484 51.52947 73.21731 51.06528 48.73098 47.79311 47.46809 60.35996 46.13791 44.65607 43.74271 43.64688

0 1.091616 0.990586 1.006234 1.062207 0 7.719821 8.257845 8.472295 8.523547 24.92882 17.21541 15.34904 15.16224 15.07037 6.127153 8.304558 8.42276 8.63616 8.691891

0 0.818114 1.700953 2.542753 2.918784 0 25.71748 24.3706 24.00572 23.93367 0 25.28729 24.2522 23.90415 23.744 30.37232 35.04219 30.36687 29.52826 29.37445

Figures:
Figure 1(a) Impulse response for Australia-China
Response of IMP1 to Cholesky One S.D. AUS_CHN_ER Innovation
.10

Response of IMP2 to Cholesky One S.D. AUS_CHN_ER Innovation

.016 .012
8 6 4 2

Response of IMP3 to Cholesky One S.D. AUS_CHN_ER Innovation

.05

.008
.00

.004 .000

-.05

-.004
-.10

-.008 -.012

-2 -4 -6 -8

-.15

-.016
-.20 2 4 6 8 10 12 14 16 18 20

-.020 2 4 6 8 10 12 14 16 18 20

10

12

14

16

18

20

Response of EX1 to Cholesky One S.D. AUS_CHN_ER Innovation

.15 .10 .05 .00

Response of EX2 to Cholesky One S.D. AUS_CHN_ER Innovation

.06
6 5

Response of EX3 to Cholesky One S.D. AUS_CHN_ER Innovation

.04
4

.02

3 2

.00
-.05

-.02
-.10

0 -1

-.15 -.20 2 4 6 8 10 12 14 16 18 20

-.04
-2

-.06 2 4 6 8 10 12 14 16 18 20

-3 2 4 6 8 10 12 14 16 18 20

Response of PPI to Cholesky One S.D. AUS_CHN_ER Innovation

0.8

Response of CPI to Cholesky One S.D. AUS_CHN_ER Innovation

.5

0.4

.4

0.0

.3

-0.4

.2

-0.8

.1

-1.2

.0

-1.6 2 4 6 8 10 12 14 16 18 20

-.1 2 4 6 8 10 12 14 16 18 20

(b) Impulse response for India-Australia

Response of IMP1 to Cholesky One S.D. AUS_IND_ER Innovation
.04 .04 .03 .02 .00 .01 .00 -.01 -.02 -.06
-.2 -.1 .1

Response of IMP2 to Cholesky One S.D. AUS_IND_ER Innovation

.2

Response of IMP3 to Cholesky One S.D. AUS_IND_ER Innovation

.02

.0

-.02

-.04

-.03 -.04 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
-.3 2 4 6 8 10 12 14 16 18 20

-.08

Response of EX1 to Cholesky One S.D. AUS_IND_ER Innovation

.05 .04 .03 .02

Response of EX2 to Cholesky One S.D. AUS_IND_ER Innovation

.06 .04 .02
0 3 2 1

Response of EX3 to Cholesky One S.D. AUS_IND_ER Innovation

.00
.01

-1 -2 -3

-.02
.00 -.01 -.02 -.03 2 4 6 8 10 12 14 16 18 20

-.04
-4

-.06 -.08 2 4 6 8 10 12 14 16 18 20

-5 -6 2 4 6 8 10 12 14 16 18 20

Response of WPI to Cholesky One S.D. AUS_IND_ER Innovation

.7 .6
.4 .6

Response of CPI to Cholesky One S.D. AUS_IND_ER Innovation

.5 .4 .3 .2
-.2 .2

.0

.1 .0 -.1 2 4 6 8 10 12 14 16 18 20
-.4

-.6 2 4 6 8 10 12 14 16 18 20

(c) Impulse response for China-India

Response of IMP1 to Cholesky One S.D. CHI_IND_ER Innovation

.15

Response of IMP2 to Cholesky One S.D. CHI_IND_ER Innovation

.08 .06 1.5

Response of IMP3 to Cholesky One S.D. CHI_IND_ER Innovation

.10

1.0

.04
.05

.02 .00 -.02

0.5

.00

0.0

-.05

-0.5

-.04
-.10

-.06 -.08
2 4 6 8 10 12 14 16 18 20

-1.0

-.15

-1.5 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20

Response of EX1 to Cholesky One S.D. CHI_IND_ER Innovation

.08 .04

Response of EX2 to Cholesky One S.D. CHI_IND_ER Innovation

4

Response of EX3 to Cholesky One S.D. CHI_IND_ER Innovation

.04

.02

.00

.00

0
-.04 -.02

-2
-.08 -.04

-.12

-.06

-4

-.16 2 4 6 8 10 12 14 16 18 20

-.08 2 4 6 8 10 12 14 16 18 20

-6 2 4 6 8 10 12 14 16 18 20

Response of PPI to Cholesky One S.D. CHI_IND_ER Innovation

.2 .1 .0

Response of CPI to Cholesky One S.D. CHI_IND_ER Innovation

.2 .1 .0

-.1 -.2 -.3 -.4

-.1 -.2 -.3

-.5 -.6 -.7 2 4 6 8 10 12 14 16 18 20

-.4 -.5 2 4 6 8 10 12 14 16 18 20