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Shock effects

02 December 2013

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The Centre for Applied Macroeconomic Analysis (CAMA) has been established to build strong links between professional macroeconomists. It provides a forum for quality research and discussion of policy issues between academia, government and the private sector.

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For more than two decades Australia has surfed the crest of the Chinese economic wave but new research from Crawford School shows that if the Chinese economy were to fall flat it could take the Australian economy with it.

The research, by Crawford School PhD student Jasmine Zheng, explores the likely effects of the US and Chinese economic shocks on Australia.

Zheng will present her research at Crawford School’s Centre for Applied Macroeconomic Analysis (CAMA) Commodities and the macroeconomy workshop on Wednesday 4 December.

She said her research found that while the US and Australian economies were always closely entwined, the two were now both also increasingly affected by changes in China.

“China is a new source of shocks for the US and Australia,” she said.

“And Australia’s increasing trade engagement with China means that economic development in China is likely to have an increasing influence on the Australian economy.”

The work is shedding new light on the impact of economic shocks in China, the US and Australia.

“I’ve found that a positive shock in Chinese economic activity effects the US and Australian economies.

“The impact of a negative financial conditions shock from the US on China and Australia is negative. If that were to happen, China does not appear to reduce the negative impact of the US financial conditions shock on Australia. In fact, with economic activity in China declining, China may spread the negative impact of the US financial conditions shock on Australia, at least initially,” she said.

She added that although China plays an increasingly important role in the global economy, the world still takes its cues from the economic environment in the US.

“Despite the increasing importance of China in the world economy, the US remains as an important source of shocks for China and Australia.”

Zheng is currently undertaking an internship at the Reserve Bank of Australia.

Story by Amelia Bidgood.

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