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What happens when the Kiwi flies? The sectoral effects of the exchange rate shocks

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  • Ozer Karagedikli
  • Michael Ryan
  • Daan Steenkamp
  • Tugrul Vehbi

Abstract

We estimate a Factor Augmented Vector autoregression (FAVAR) to identify idiosyncratic exchange rate shocks and examine the effects of these shocks on different sectors of the economy. We find that an unexpected shock to the exchange rate has significant effects on the tradable sector of the economy. While this is expected, the nontradable sectors of the economy are also influenced by shocks to exchange rate. We argue that one important channel for this influence is the endogenous/cyclical nature of the population dynamics due to permanent and long term migration.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-73.

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Length: 33 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-73

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  1. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
  2. Alfred A Haug & Christie Smith, 2007. "Local linear impulse responses for a small open economy," Reserve Bank of New Zealand Discussion Paper Series DP2007/09, Reserve Bank of New Zealand.
  3. Richard Fabling & Lynda Sanderson, 2013. "Export performance, invoice currency, and heterogeneous exchange rate pass-through," Treasury Working Paper Series 13/03, New Zealand Treasury.
  4. Hahn, Elke, 2007. "The impact of exchange rate shocks on sectoral activity and prices in the euro area," Working Paper Series 0796, European Central Bank.
  5. Haroon Mumtaz & Paolo Surico, 2009. "The Transmission of International Shocks: A Factor-Augmented VAR Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 71-100, 02.
  6. Mumtaz, Haroon & Sunder-Plassmann, Laura, 2010. "Time-varying dynamics of the real exchange rate. A structural VAR analysis," Bank of England working papers 382, Bank of England.
  7. Emmanuel De Veirman & Ashley Dunstan, 2011. "Time-varying returns, intertemporal substitution and cyclical variation in consumption," Reserve Bank of New Zealand Discussion Paper Series DP2011/05, Reserve Bank of New Zealand.
  8. K. Farrant & G. Peersman, 2005. "Is the exchange rate a shock absorber or a source of shocks? New empirical evidence," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/285, Ghent University, Faculty of Economics and Business Administration.
  9. Brosnan, Peter & Poot, Jacques, 1987. "Modelling the Determinants of Trans-Tasman Migration after World War II," The Economic Record, The Economic Society of Australia, vol. 63(183), pages 313-29, December.
  10. Buckle, Robert A. & Kim, Kunhong & Kirkham, Heather & McLellan, Nathan & Sharma, Jarad, 2007. "A structural VAR business cycle model for a volatile small open economy," Economic Modelling, Elsevier, vol. 24(6), pages 990-1017, November.
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Cited by:
  1. Jamie Murray, 2013. "Parameter Uncertainty and the Fiscal Multiplier," Treasury Working Paper Series 13/19, New Zealand Treasury.
  2. Enzo Cassino & David Oxley, 2013. "How Does the Exchange Rate Affect the Real Economy? A Literature Survey," Treasury Working Paper Series 13/26, New Zealand Treasury.

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