RBA Modelling Shows Precisely How Much The Dollar's Fall Can Affect Australia's Economic Growth

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The RBA Bulletin was released this morning and in it was a great article which highlighted just why RBS Governor Glenn Stevens wants the Aussie dollar lower.

We’ll spare you the economic wonkishness and get straight to the conclusion.

The paper, written by staffers from the RBA’s Economic Analysis Unit says that a temporary 10% depreciation in the real exchange rate for the Aussie dollar can increase growth by between a quarter and a half of a percent over 2-3 years.

If that depreciation is sustained then growth is likely to be 1% higher two years later.

So with Australian inflation higher than the rest of the world even though the Aussie dollar is 11 cents lower than where it was 12 months ago, and the TWI falling, growth is likely higher, as Q4 GDP showed.

But the question is whether or not it is enough.

Based on comments from RBA Governor Stevens that growth is still going to be below trend, it is not. One reason is that the recent first read of 2014-15 Capex figures show that the fall in investment is likely to reduce growth by 1% (all other things equal), offsetting any Aussie dollar induced gains to growth, based on the levels outlined above.

So the Aussie’s fall is likely to offset weaker investment to a certain extent but given it is still high by historical standards further falls are necessary to really kick growth along.

That’s why the RBA wants it lower.

You can read the full article here.

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