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

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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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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. Campbell, John & Clarida, Richard, 1987. "The Dollar and Real Interest Rates," Scholarly Articles 3221495, Harvard University Department of Economics.
  2. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals," IMF Working Papers, International Monetary Fund 98/67, International Monetary Fund.
  3. 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, Palgrave Macmillan, vol. 47(1), pages 5.
  4. Peter B. Clark & Ronald MacDonald, 2000. "Filtering the Beer," IMF Working Papers, International Monetary Fund 00/144, International Monetary Fund.
  5. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of it," IMF Working Papers, International Monetary Fund 97/21, International Monetary Fund.
  6. Susana Garcia Cervero & J. Humberto Lopez & Enrique Alberola Ila & Angel J. Ubide, 1999. "Global Equilibrium Exchange Rates," IMF Working Papers, International Monetary Fund 99/175, International Monetary Fund.
  7. 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, Econometric Society 0051, Econometric Society.
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Cited by:
  1. Holtemöller, Oliver & Mallick, Sushanta, 2013. "Exchange rate regime, real misalignment and currency crises," Economic Modelling, Elsevier, Elsevier, vol. 34(C), pages 5-14.
  2. Dominick Stephens, 2004. "The equilibrium exchange rate according to PPP and UIP," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP 2004/03, Reserve Bank of New Zealand.
  3. Siregar, Reza, 2011. "The Concepts of Equilibrium Exchange Rate: A Survey of Literature," MPRA Paper 28987, University Library of Munich, Germany.
  4. Nikolaos Giannellis & Athanasios Papadopoulos, 2005. "Estimating the Equilibrium Effective Exchange Rate for Potential EMU members," Working Papers, University of Crete, Department of Economics 0719, University of Crete, Department of Economics, revised 08 Mar 2007.
  5. Reza Siregar & Ramkishen Rajan, 2006. "Models of Equilibrium Real Exchange Rates Revisited: A Selective Review of the Literature," Centre for International Economic Studies Working Papers, University of Adelaide, Centre for International Economic Studies 2006-04, University of Adelaide, Centre for International Economic Studies.
  6. 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, Reserve Bank of New Zealand DP 2004/08, Reserve Bank of New Zealand.

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