Floating Exchange Rates, Inflation and Selective Protectionism: their Effects on the Competitiveness of Australian Industry

Inflation and exchange rate variability continue to be major features of the world economy. Coinciding with the movement in floating exchange rates, rates of inflation have been both high and highly variable across countries. In terms of period-to-period movements, nominal exchange rates are more volatile than relative price levels, and hence, in the short run at least, movements in nominal exchange rates can have substantial effects on the real exchange rate (defined as the nominal exchange rate adjusted for differences in relative internal price levels). In this respect, the Australian case appears consistent with the international experience.