This thesis empirically investigates the proposition that Australia's macroeconomic fortunes have become tied to China's. This assertion, which we label the China Boom Hypothesis, is now ubiquitous in Australia's macroeconomic policy dialogue, although to the best of our knowledge it has yet to be explicitly tested. Two other hypotheses that are tested are that Australia has become "decoupled" from the U.S., and that China has emerged as a new and independent source of world growth.
This investigation of international macroeconomic synchronisation involves three stages of testing. The first is a simple correlation analysis of growth rates that incorporates lagged effects. The second makes use of concordance indices and correlation coefficients to determine the presence and extent of macroeconomic cycle synchronisation. Application of these techniques requires a chronology of turning points of the macroeconomic cycles which are to be analysed. There are three macroeconomic cycles defined and measured in this thesis; the classical business cycle, growth cycle, and growth-rate cycle. The third approach analyses synchronisation by detecting and measuring international macroeconomic interdependencies and business cycle transmissions using vector autoregressive models. As well as introducing causation testing, this approach facilitates experiments concerning the expected response of Australia's real GDP to a shock in China's real GDP and U.S. real GDP, and of China's real GDP to U.S. real GDP.
On balance, the evidence fails to lend robust support to the CBH. Since 2000 there has been no increase in the correlation of growth rates between Australia and China, nor has growth-rate cycle concordance or correlation increased. On the other hand, the VAR analysis does suggest a causal relationship running from China's real GDP to Australia's, albeit the magnitude of the impact is modest. Neither Australia nor China show significant correlation with the U.S. at the end of the sample period. Such findings are supportive of the contention that Australia has decoupled from the U.S., although whether it was ever coupled in the first place is debatable, and that China has emerged as a new and independent source of world growth.