Australian Exchange Rate Essay Research Paper What — страница 4

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inflationary pressures and putting low inflation at risk. This was the first time since 1986 when the RBA had openly adjusted interest rates in response to movements in the exchange rate. THE EFFECTS OF EXCHANGE RATE MOVEMENTSBoth depreciation and appreciation of the value of the Australian dollar have negative and positive effects. If depreciation occurs it raises the domestic price of foreign goods as well as reducing the foreign price of exports. If appreciation occurs, it lowers the domestic price of foreign goods and raises the foreign price of exports. DEPRECIATIONThe depreciation of Australia?s currency has a number of positive effects. They are: ?In the long term, a depreciation of the exchange rate enhances the competitiveness of the tradable goods sector (producers that

compete with exports and imports) by making Australian goods and services cheaper and thus more competitive relating to the same goods and services produced overseas. This will help to raise export income and reduce import expenditure. Overall this will help to improve the Current Account Deficit (CAD). This theory is known as the theory of the ?J Curve?. ?A depreciation may encourage higher levels of capital inflow into Australia as domestic assets become cheaper relative to their foreign counter-parts. This can help to reduce the level of foreign debt and increase foreign equity investment in Australia. ?A depreciation can lead to a structural change in the make-up of the Australian economy e.g. a shift to the manufacturing and services export industries. Along with the

above-mentioned positive effects, there are also negative effects. These are: ?A depreciation of the currency can raise the cost of imports and reduce the price of exports in the short term. This can lead to lower export volume income from the sale of a given volume of exports and raise the cost of a given volume of imports. Lower export income and higher import expenditure in the short term will increase the size of the CAD. ?A depreciation can often lead to a higher inflation rate. This will occur if monetary policy is unable to contain inflationary expectations. Since the 1990?s micro-economic policies have been adopted to smooth out inflation and make the economy more flexible when dealing with large currency shocks such as the 1997 Asian crisis. Examples of these policies

include enterprise bargaining and the national competition policy. ?An immediate impact of a depreciation in the dollar is to increase the value of the part of the net foreign debt to which the value of the AUD has depreciated against. e.g. If the AUD depreciates against the then the section of foreign debt to USA will increase in value. ?A depreciation of the AUD will raise the ?debt-servicing ratio.? The debt-servicing ratio is the interest repayments as a percentage of exports. Higher interest repayments can lead to a higher net income deficit and increase the size of the CAD ?A large depreciation could lead the RBA indirect intervention to support the exchange rate by raising interest rates. This can lead to lower economic growth and investment thus reducing employment and

domestic confidence levels. APPRECIATIONAs with depreciation, appreciation has both negative and positive effects. Some of the positive effects include: ?And appreciation of the exchange rate lowers the costs of imports and increases the price of exports in the short-term. This can lead to a higher export income and lower export expenditure. This will lead to a reduction in the size of the CAD. ?Appreciation may lead to lower domestic inflation rates due to the lower import prices. This should raise the real income of consumers who can then in return increase standards of living by being able to purchase a variety of imports at a cheaper price. ?An appreciation will reduce the value of the section of foreign debt to which the currency has appreciated. If the value of the AUD

rises relative to , Australia?s foreign debt to the USA will decrease. ?An appreciation will reduce the debt-servicing ratio. Lower interest repayments can lead to a higher net income deficit and decrease the size of the CAD. The negative effects of an appreciation of the currency are as followed: ?In the long term it will decrease the competitiveness of Australian producers in the tradable goods sector. Australia?s goods and services will become less price competitive and therefore less attractive to overseas buyers. The CAD would increase if this were to occur. ?An appreciation could lead to higher levels of capital outflow from Australia. This is because Australian assets become more expensive and less attractive relative to goods and services produced overseas. This would