This paper compares the macroeconomic effects of global oil and iron ore price shocks on the Australian economy. Using a Bayesian structural vector autoregression (VAR) model with sign restrictions, we identify three types of shock: supply, demand and specic demand.

The main results suggest that, over the period 1990Q1 to 2014Q4, the oil shock has a relative larger impact than that of the iron ore shock on output and infation while the iron ore shock is the dominant source of interest and exchange rate movements. The effects crucially depend on the underlying sources of oil or iron ore price shifts. As Australia is a small open economy, oil and iron ore prices should be treated as exogenous factors. Real GDP responds negatively to the rise of oil prices driven by supply disruptions but positively to a similar shock on the iron ore market.

Higher global demand for these commodities has a positive impact on the economy but the iron ore demand shock is about two times larger. However, a positive oil and iron ore price shock driven by specic demand lead to a temporary decline in real GDP.

Nguyen, B., & Hoang, N. (2018).Oil and Iron Ore Price Shocks: What are the Different Economic Effects in Australia? Economic Record.