The Impact of Exchange Rate Fluctuations on Australian Macroeconomics
Date Issued
2011
Date
2011
Author(s)
Mai, Chiao-Pei
Abstract
The main purpose of this study is to investigate the impact of exchange rate fluctuations on macroeconomics variables, especially the imports, exports, output, prices and other variables. This study employed Johansen’s cointegration analysis and Vector Error Correction(VEC) model to test the effect of the exchange rate fluctuations on macroeconomics in a small open economy, Australia. By impulse response functions and variance decomposition, this study observes the direction and strength reaction of variables under the external shocks of exchange rate to better understand the influence of exchange rate on Australian macroeconomics.
The empirical results show that when the real effective exchange rate index increased (relative to a basket of currencies on behalf of Australian dollar appreciation), real export, real import and prices all increase. However, the reaction of real output decrease after the first phase. In contrast with the traditional economic theory, the empirical results show that real import and real output are consistent with the traditional economic theory, but real export and prices have the opposite result with it. The results indicated that there is a strong relation between the Australian economics structure and macroeconomics variables.
Subjects
exchange rate volativity
cointegration
vector error correction
impulse response function
variance decomposition
Type
thesis
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