Is The Gold Fever too High?

As the metal, mineral and fossil fuels prices seem to be more volatile in the new millennium, the global economy is affected in many ways. As most of Australia’s main export products originate from the mining sector, shifts in the real exchange rate and other macroeconomic variables occur because of the commodity price shocks and in their turn affect the exports of unrelated sectors. Because little empirical research has been conducted on this topic, an interesting approach would be to first test these effects by an ‘one fit for all’ Vector Error Correction Model on three sectors, instead of making a sector specific model for each sector. For the best performing shock definition we will run a deterministic dynamic simulation for a base model and an alternative model with an artificial shock to determine the effects of both a negative and a positive shock. While there is room for improvement in the used methodology, in two out of three cases the model with the best performing shock definition was robust and the effect is in line with the literature. After an initial period of uncertainty which causes a negative effect, a positive shock will have a negative effect on the real exports, while a negative shock will have an positive effect.