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Modelling the long-run real effective exchange rate of the New Zealand Dollar

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Abstract

The usefulness of the concept of an equilibrium exchange rate has been brought into sharp focus by the dramatic depreciation of the euro since its inception in 1999. Does this movement reflect a movement of the actual exchange rate relative to its equilibrium or has the equilibrium shifted relative to the perception of where the euro was in 1999? Similar kinds of questions have been asked about the behaviour of the New Zealand dollar since the latter part of 1999. To answer these kinds of questions it is necessary to have some measure of an equilibrium exchange rate and there are a plethora of alternative approaches available in the literature. In this paper we use the behavioural equilibrium exchange rate (BEER) approach of Clark and MacDonald (1999) to produce long-run equilibrium exchange rates for the effective real exchange rates of the New Zealand dollar. We demonstrate that a well founded measure of the equilibrium value of the dollar may be recovered from a relatively small set of fundamental variables and that this can be used to produce an assessment of the dollar in terms of periods of misalignment.

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Bibliographic Info

Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2002/02.

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Length: 35p
Date of creation: Oct 2001
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Handle: RePEc:nzb:nzbdps:2002/02

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  1. Enrique Alberola & Susana G. Cervero & Humberto Lopez & Angel Ubide, 2000. "Global Equilibrium Exchange Rates: Euro, Dollar, "Ins," "Outs," and Other Major Currencies in a Panel Cointegration Framework," Econometric Society World Congress 2000 Contributed Papers 0051, Econometric Society.
  2. Campbell, John Y. & Clarida, Richard H., 1987. "The dollar and real interest rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 103-139, January.
  3. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals," IMF Working Papers 98/67, International Monetary Fund.
  4. Peter B. Clark & Ronald MacDonald, 2000. "Filtering the Beer," IMF Working Papers 00/144, International Monetary Fund.
  5. Susana Garcia Cervero & J. Humberto Lopez & Enrique Alberola Ila & Angel J. Ubide, 1999. "Global Equilibrium Exchange Rates," IMF Working Papers 99/175, International Monetary Fund.
  6. Ronald MacDonald & Jun Nagayasu, 2000. "The Long-Run Relationship Between Real Exchange Rates and Real Interest Rate Differentials: A Panel Study," IMF Staff Papers, Palgrave Macmillan, vol. 47(1), pages 5.
  7. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of it," IMF Working Papers 97/21, International Monetary Fund.
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Cited by:
  1. Ramkishen S. Rajan & Reza Y. Siregar, 2007. "Models of Equilibrium Real Exchange Rates Revisited: A Selective Review of the Literature," Working Papers id:1198, eSocialSciences.
  2. Reza Siregar, 2011. "The Concepts of Equilibrium Exchange Rate: A Survey of Literature," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp81, June.
  3. Holtemöller, Oliver & Mallick, Sushanta, 2013. "Exchange rate regime, real misalignment and currency crises," Economic Modelling, Elsevier, vol. 34(C), pages 5-14.
  4. Nikolaos Giannellis & Athanasios Papadopoulos, 2007. "Estimating the Equilibrium Effective Exchange Rate for Potential EMU Members," Open Economies Review, Springer, vol. 18(3), pages 307-326, July.
  5. Angela Huang, 2004. "Examining finite-sample problems in the application of cointegration tests for long-run bilateral exchange rates," Reserve Bank of New Zealand Discussion Paper Series DP 2004/08, Reserve Bank of New Zealand.
  6. Dominick Stephens, 2004. "The equilibrium exchange rate according to PPP and UIP," Reserve Bank of New Zealand Discussion Paper Series DP 2004/03, Reserve Bank of New Zealand.

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