The impact of exchange rate volatility on Australian exports

The impact of exchange rate volatility on exports has important implications for exchange rate and export policy. The present study empirically analyses whether post-float Australian exchange rate volatility has been 'excessive', using a time varying measure of exchange rate volatility. The effect of post-float exchange rate volatility on Australian aggregate and manufactured exports in the short run and long run is examined using Johansen and Juselius (1992) cointegration and error correction techniques. The analysis extends to an investigation of the applicability of the small country assumption to Australian exports. The results indicate that the determination as to whether exchange rate volatility has been excessive is dependent upon the benchmark used for comparison. Exchange rate volatility is found to positively impact on the volume of both aggregate and manufactured exports in the short run and long run. The impact of exchange rate volatility on prices is insignificant for total exports, and positive for manufactured exports. These findings suggest that exchange rate stabilisation policies are not justified on the grounds of avoiding harmful effects of exchange rate volatility on exports. Although the results indicate some support for the applicability of the small country assumption to Australian aggregate exports in the long run, the small country assumption is shown to be invalid for short run aggregate exports, or short run and long run manufactured exports.