The impact of an exchange rate shock on Australian economy

It has been more than 30 years since 1983 when the floating exchange rate regime was introduced in Australia. The floating exchange rate is widely considered to bring benefits to the Australian economy through its role as a shock absorber. The present project investigates how the movement of the exchange rate affects Australian GDP and employment in the post-float era. The study’s results demonstrate that the impact from a one-standard-deviation unanticipated real exchange rate shock tends to cause more sectoral shifts on Australian GDP and employment growth rather than aggregate disturbances in the short run. We find that shock impacts are statistically insignificant on aggregate GDP growth and employment growth. At the industrial level, the extent of such shock impacts is largely based on the trade-exposure characteristics of industries. Finally, the results confirm that the floating exchange rate behaves as a shock absorber in the short run.