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Exchange Rates, Non-Traded Goods and the Terms-of-Trade: An Empirical Application for New Zealand

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Eric Hansen
Michael M. Hutchison

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Abstract

This article formulates and tests for New Zealand a model of exchange rate determination focusing on non-tradeable goods and terms-of-trade shifts. We emphasise the equilibrium properties of this framework and, in this context, estimate an error correction model where adjustment in response to deviation from equilibrium is important determinant of short-run exchange rate movements. We estimate the model using a new data series on the supply of non- tradeable goods. The model has desirable empirical characteristics, including a plausible error correction equation, strong support for cointegration and rapid convergence to the long-run equilibrium. Moreover, a variety of diagnostic statistics, including parameter stability rests and out-of-sample forecasting performance, indicate the equation is a parsimonious representation of the data. These results provide considerable support for the emphasis on "real" determinants of nominal exchange rates, in this case fluctuations in non-traded goods and terms-of trade.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 96-11.

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Handle: RePEc:kud:epruwp:96-11

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  1. Wolfgang Eggert & Martin Kolmar, . "Contests with Size Effects," EPRU Working Paper Series 02-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
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  2. Debabrata Bagchi & Georgios E. Chortareas & Stephen M. Miller, 2003. "The Real Exchange Rate in Small Open Developed Economies: Evidence from Cointegration Analysis," Working papers 2003-27, University of Connecticut, Department of Economics. [Downloadable!]
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  3. Economics Department, 1995. "Recent Reserve Bank research," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 58, September. [Downloadable!]
  4. Wolfgang Eggert & Laszlo Goerke, . "Fiscal Policy, Economic Integration and Unemployment," EPRU Working Paper Series 02-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
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  5. Robert A Buckle & Kunhong Kim & Heather Kirkham & Nathan McLellan & Jared Sharma, 2002. "A structural VAR model of the New Zealand business cycle," Treasury Working Paper Series 02/26, New Zealand Treasury. [Downloadable!]
  6. Kilponen, Juha & Mayes, David & Vilmunen, Jouko, 1999. "Labour Market Flexibility in Northern Europe," ERSA conference papers ersa99pa088, European Regional Science Association. [Downloadable!]
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  7. Wolfgang Eggert & Martin Kolmar, . "Information Sharing, Multiple Nash Equilibria, and Asymmetric Capital-Tax Competition," EPRU Working Paper Series 02-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  8. Mayes , David & Vilmunen, Jouko, 1999. "Unemployment in a Small Open Economy: Finland and New Zealand," Research Discussion Papers 10/1999, Bank of Finland. [Downloadable!]
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