Exchange rate volatility and trade/productivity in Australia

Zheng, Shuwei Jasmine. (2005). Exchange rate volatility and trade/productivity in Australia Honours Thesis, School of Economics, The University of Queensland.

       
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Author Zheng, Shuwei Jasmine.
Thesis Title Exchange rate volatility and trade/productivity in Australia
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2005
Thesis type Honours Thesis
Total pages 161
Language eng
Subjects 14 Economics
Formatted abstract In Australia, exchange rate volatility has significantly increased after the floating of the exchange rate in 1983. On an international basis, there have been concerns about the possible detrimental effects exchange rate volatility could have on trade volumes and productivity levels. Since productivity growth and trade have been regarded as crucial factors in the promotion of sustainable economic growth and improving the material living standards for Australians, further research into the relationship between exchange rate volatility and trade/productivity will prove to be useful to policy makers. The objective of this study is twofold. Firstly, in light of the Australia-United States (US) productivity gap, this thesis will investigate whether there is reverse causality flowing from the real exchange rate movements/volatility to labour productivity in Australia. The importance of significant exchange rate depreciation/volatility having a negative impact on productivity has been highlighted by Harris (2002) for the case of Canada. Secondly, the impact of exchange rate volatility on Australian export volumes to US and Japan will be analysed. Although extensive theoretical and empirical research on this relationship has been conducted, this issue has remained highly ambiguous. To date, no empirical study has taken into consideration the threshold effects of exchange rate volatility on export volumes. Therefore, this thesis examines the relationship between exchange rate volatility and trade/productivity via linear and non linear threshold estimations of the trade and productivity models. The non linear threshold models estimation in this thesis is based on Hansen (2000)'s methodology. To ensure that sound economic interpretations of the models can be made, cointegration tests will be conducted and Vector Error Correction Models (VECMs) will be estimated. The econometric results obtained from this thesis indicate that long run equilibrium relationships between exchange rate volatility and trade/productivity exist. However, Granger Causality tests employed could not find evidences supporting the reverse causality link for the case of productivity. Finally, significant threshold effects of exchange rate volatility on trade/productivity have been tested for, suggesting that standard trade/productivity models involving exchange rate volatility have understated their true underlying relationships.
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