Measuring Exchange Rate Uncertainty: The Case of the Australian Dollar 1969 to 1987

Simon Avenell, Robert Leeson and Gavin Wood

Australian Economic Review, 1989, vol. 22, issue 2, 34-42

Abstract: In this article indices of exchange rate uncertainty are measured from the perspective of potential impacts on trade flows. Empirical evidence based on movements in the Australian dollar spot rates and forward rates indicates that there has been an increase in currency risk between 1969 and 1987, which is not surprising given the progressive relaxation of the exchange rate regime during this period. More surprising is the finding that exchange rate uncertainty indices have risen relative to domestic financial price uncertainty indices. This would not have been expected to occur if increased currency risk had been solely due to growing instability of the underlying economic environment. However, since there is evidence that currency risk has been offset by domestic risk, the risk burden of diversified international traders may not have been adversely affected.

Date: 1989
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