An Import demand function for the Australian economy using Vector Autoregression techniques

The recent growth in the Chinese economy appears to have contributed to the recent mining boom in Australia. While Australia’s mining industry is an export-oriented industry, the imported capital equipment suggests that there may be a relationship between exports and imports. This paper analyses whether imports are likely to be affected by exports. While this question has received some attention in the literature, this is the first Australian study to investigate this relationship using a Vector Autoregression (VAR) approach. This VAR model thus incorporates lagged values of imports and exports as explanatory variables. To develop this model, data from 1984-2012 was used. The data was tested for stationarity; and these tests conclude that there is a statistically significant cointegrating relationship between imports and exports. Policymakers may benefit from an understanding of this relationship; as such an understanding might assist them in the formulation of future international trade policy for Australia.