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Australia's Real Exchange Rate--Is It Explained by the Terms of Trade or by Real Interest Differentials?

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  • Gruen, David W R
  • Wilkinson, Jenny

Abstract

The authors find weak evidence of a stable relationship between the Australian real exchange rate and the terms of trade from 1969 to 1990. Since the float, the terms of trade and long real interest differentials together help to explain the real exchange rate. The authors' best estimates are that a real exchange rate appreciation of about 0.3 to 0.5 percent is associated with a one percent improvement in the terms of trade, while an appreciation of about 2 to 3.5 percent is associated with an increase of one percentage point in the differential between Australian and world long real interest rates. Copyright 1994 by The Economic Society of Australia.

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Bibliographic Info

Article provided by The Economic Society of Australia in its journal The Economic Record.

Volume (Year): 70 (1994)
Issue (Month): 209 (June)
Pages: 204-19

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Handle: RePEc:bla:ecorec:v:70:y:1994:i:209:p:204-19

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  1. Blinder, Alan S, 1988. "The Fall and Rise of Keynesian Economics," The Economic Record, The Economic Society of Australia, vol. 64(187), pages 278-94, December.
  2. Rudiger Dornbusch and Jeffrey Frankel., 1988. "The Flexible Exchange Rate System: Experience and Alternatives," Economics Working Papers 8868, University of California at Berkeley.
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  4. Meese, Richard A & Rogoff, Kenneth, 1988. " Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period," Journal of Finance, American Finance Association, vol. 43(4), pages 933-48, September.
  5. Matthew T. Jones & Jenny Wilkinson, 1990. "Real Exchange Rates and Australian Export Competitiveness," RBA Research Discussion Papers rdp9005, Reserve Bank of Australia.
  6. Laurence Ball, 1991. "The Genesis of Inflation and the Costs of Disinflation," NBER Working Papers 3621, National Bureau of Economic Research, Inc.
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  9. Jeffrey Sachs, 1985. "The Dollar and the Policy Mix: 1985," NBER Working Papers 1636, National Bureau of Economic Research, Inc.
  10. Jeffrey A. Frankel & Richard Meese, 1987. "Are Exchange Rates Excessively Variable?," NBER Working Papers 2249, National Bureau of Economic Research, Inc.
  11. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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  13. Corbae, Dean & Ouliaris, Sam, 1991. "A Test of Long-Run Purchasing Power Parity Allowing for Structural Breaks," The Economic Record, The Economic Society of Australia, vol. 67(196), pages 26-33, March.
  14. Hooper, Peter & Morton, John, 1982. "Fluctuations in the dollar: A model of nominal and real exchange rate determination," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 39-56, January.
  15. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
  16. Pagan, Adrian R & Wickens, M R, 1989. "A Survey of Some Recent Econometric Methods," Economic Journal, Royal Economic Society, vol. 99(398), pages 962-1025, December.
  17. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
  18. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  19. Adrian Blundell-Wignall & Marilyn Thomas, 1987. "Deviations From Purchasing Power Parity: The Australian Case," RBA Research Discussion Papers rdp8711, Reserve Bank of Australia.
  20. Adrian Blundell-Wignall & Robert G. Gregory, 1990. "Exchange Rate Policy in Advanced Commodity-Exporting Countries: The Case of Australia and New Zealand," OECD Economics Department Working Papers 83, OECD Publishing.
  21. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
  22. Clements, M.P., 1989. "The Estimation And Testing Of Cointegrating Vectors: A Survey Of Recent Approaches And An Application To The U.K. Non-Durable Consumption Function," Economics Series Working Papers 9979, University of Oxford, Department of Economics.
  23. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
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