from macrobusiness today using some research from Barclays
The RBA has provided the first new estimates of the impact of the exchange rate on growth in almost a decade
In the latest Statement on Monetary Policy, the Reserve Bank published its first estimate of the impact of the exchange rate on growth since it last explored the issue in a 2005 research paper.
In 2005, the Reserve Bank presented results that showed that an 18% drop in the real exchange rate boosted growth by about 1pp, with most of the effect felt in the first year.
Now, the Reserve Bank has said that “central estimates [from research] suggest that a 10% depreciation of the exchange rate stimulates GDP growth by ˝-1 percentage point over a period of two years or so”.
Interestingly, the more recent research is similar to our own work that showed that a 9% drop in the real exchange rate boosted growth by close to 1pp.
We used the RBA estimates to calibrate the impact of the exchange rate on activity over time
To get a crude sense of the impact of the exchange rate on activity over time, we took the mid-point of the RBA’s estimates, such that a 10% drop in the exchange rate boosts growth by about 0.75pp. We then used a normal distribution to calibrate the boost to growth from a depreciation of the exchange rate over a two-year period.
By design, the results show that most of the impact of a lower exchange rate are felt at the end of the first year and early in the second year (see Figure 1). We are mindful that the Reserve Bank may have a different profile for the impact of the exchange rate, although the bank’s 2005 analysis also showed that the most of the effect was felt around the 1 year mark.