RDP 9612: External Influences on Output: An Industry Analysis 5. Conclusion

This paper has focussed on the production side of the national accounts and found that, after controlling for the effects of domestic demand, about two-thirds of Australia's private-sector industrial output is related in some way to developments in the United States. The foreign links that Gruen and Shuetrim (1994) identified are pervasive. Australian and US industrial structures are similar, and developments in the United States tend to lead Australia. Aggregate demand in the United States has strong, persistent short and long-run effects on agricultural, mining, and finance and property output. But the foreign links for the bulk of manufacturing lie not with general economic developments in the United States, but with what is happening in the corresponding US sector. These links are strongest in certain goods sectors, and are persistent or long run. The feature that distinguishes the production processes of these goods is that they involve high and often radically changing technology. The implication is, then, that these linkages with the United States, which is the world leader in productivity and innovation, are driven by the supply side. This result seems to be robust to alternative specifications, and is unexplained by institutional features, like foreign ownership or trade intensity. These shocks also affect aggregate output, and so the analysis is identifying something more fundamental than just compositional changes in aggregate output. Service sector output appears to be most affected by domestic aggregate demand.

The importance of the US economy should not obscure the result, however, that policy and events in the domestic economy are crucial, especially in the short and medium term. There is no implication that domestic monetary and fiscal policies are irrelevant. Indeed, even in simple modelling exercises, monetary policy can have large effects in different industries. Interest rate changes have both direct and indirect effects on sectoral outputs, the latter arising from the effect of an interest rate change on the exchange rate and on the state of aggregate demand. These particular effects vary across different manufacturing industries, with the sectors of manufacturing with higher import ratios more affected by the exchange rate, and the more domestic-oriented sectors more affected by domestic demand. While developments in the United States have persistent, long-run effects on local manufacturing output, domestic policies affect local aggregate demand which in turn can have a large impact on output in the short term.