Do exchange rate volatility and income affect Australia’s maritime export flows to Asia?

Abstract

Given that existing literature does not explicitly take exchange rate volatility into account in an international maritime freight model, this paper attempts to examine the short- and long-run impacts of real income, bilateral exchange rate, and exchange rate volatility on Australia’s maritime export volume to its major Asian trading partners (China, Japan, Republic of Korea, Taiwan, India, Indonesia, and Malaysia). Using quarterly data for the period of 2000:Q1-2013:Q2, we include two measures of real exchange rate volatility (GARCH(1,1) and mean-adjusted relative change measures) for comparison purposes. The results show that real income is a crucial determinant of maritime export volume in both the short- and long-run, implying that Australia’s maritime exports are predominantly driven by the economic growth in its major Asian trading partners. This paper finds evidence that exchange rate volatility has a significant long-run effect in the majority of cases, suggesting that exchange rate volatility appears to be an important factor affecting maritime export volume. The effects of exchange rate volatility are found to vary across country-pairs, and hence confirming the importance of using disaggregate data to uncover the differential effects on maritime exports by country. This study also reveals that the two measures of exchange rate volatility can produce different effects and thereby, it is important to select an appropriate measure of exchange rate volatility.