Oil prices and the Australian macroeconomy : historical correlation or causation?

TL;DRAbstract

There is a large body of literature that claims that oil prices have a causal relationship with the macroeconomy. In light of recent developments in the oil market and the strength of the U.S. and Australian macroeconomies, the proposed relationship no longer appears valid. This thesis will examine the causal hypothesis for Australia, a country which has not been previously studied in the literature. As the first step in the estimations, the real trade weighted index is constructed for the period 1959 to 2006 in order to allow the study to extend from 1959 to 2006. Retracing the major developments in the international literature, it is found that oil prices have not had a causal relationship with either the level or growth rate of real GDP in Australia. The incorporation of asymmetric channels or alternate oil price specifications, as proposed in the literature, do not change these results. Yet, there is some evidence that the unemployment rate has been significantly affected by past o

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