RDP 9005: Real Exchange Rates and Australian Export Competitiveness 5. Summary

This paper develops several long-run external measures of the real exchange rate, based on international price competitiveness. The indices are calculated over the period 1960 to 1989 as geometric weighted averages of bilateral real exchange rates. Several different bilateral and third country based export weights are used. The real exchange rate indices are estimated using the CPI as the price deflator.

The most notable difference between our various indices is that over the 1970's and 1980's the third country index consistently measures Australia's real exchange rate at a higher level, and hence our competitiveness at a lower level, than do the other bilateral export weighted indices. And, since the March quarter 1984, the third country index suggests our competitive position has improved by less than the other measures suggest.

Estimates derived in this paper show that although the real exchange rate fell by about thirty percent between the March Quarter 1984 and the September Quarter 1986, this was subsequently substantially eroded. By the December quarter 1989, the real exchange rate was only about ten percent below its March 1984 level. Over this period, we found that movements in the real exchange rate were dominated by movements in the nominal exchange rate.