A three-sector structural VAR model for Australia

Abstract

We develop a three-sector structural VAR model of the Australian economy to analyze the macroeconomic effects of resource reallocation among the mining, manufacturing and non-tradable sectors in the context of the resource boom of the 2000s. Impulse response analysis reveals that both commodity demand and supply shocks drive the reallocation of capital and labor toward the mining sector, with the reallocation being larger and more enduring in the case of a demand shock. Using a novel measure of spillover intensity constructed from a multivariate historical decomposition, we identify four phases that characterize the Australian economy between 1988 and 2019: (i) capital deepening; (ii) the resource boom; (iii) the unwinding of the boom; and (iv) the post-boom phase. We show that the structural shocks generate patterns of sectoral reallocation that vary across these four phases. Overall, our results indicate evidence of structural change with little evidence of Dutch disease.