The effect of exchange rate volatility on Australian exports : an error correction analysis

The impact of exchange rate volatility on trade, is at the centre of the debate concerning the choice between flexible and fixed exchange rate regimes. This thesis presents an empirical examination on the effect volatility has on Australian exports, having first determined whether the dollar is comparatively more volatile since the float of 1983. The analysis also extends to an investigation, as to what the likely impact of Australia's export drive will be on the terms of trade, and in particular whether the small country assumption is valid. Using two time varying measures of volatility, it is found that the Australian dollar has become more volatile post float. It is then found, using Phillips-Hansen cointegration and error correction techniques, that this volatility has a negative effect on export volumes. The effect on export price IS indeterminate for total exports and negative for manufactured exports. The conclusion with regard to export enhancement, is that such a policy is unlikely to have a detrimental effect on the terms of trade, although evidence in favour of the small country assumption could be found only for total exports.