Abstract
This paper analyses the impact of exchange rate volatility on Australian trade flows. ARCH models are used to generate a measure of exchange rate volatility which is then tested in a model of Australian imports and exports. This paper differs from many of the papers previously published as special attention is given to the export and import trade data sets used. Not only is aggregate trade data tested for the effects of volatility, but disaggregate sectoral trade data is also analysed. Testing sectoral trade data allows us to detect whether the direction or magnitude of the impact of volatility differs depending on the nature of the market in which the goods are traded. If the effect of exchange rate volatility does differ by market, then testing aggregate trade data convolutes the true nature of the relationship and may prevent a significant relationship from being derived. The results obtained in this paper suggest that the impact of exchange rate volatility does differ between traded good sectors although it remains difficult to firmly establish the nature of the relationship.
Published Version
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