New Zealand's Exchange Rate Cycles: Evidence and Drivers
AbstractThis paper seeks to understand the extent of New Zealand’s exchange rate fluctuations compared to others, and what drives New Zealand’s exchange rate. New Zealand has only experienced a limited number of exchange rate cycles since the dollar was floated. On a trade-weighted basis this paper finds that New Zealand has large exchange rate cycles, but that some other relevant economies (e.g. Australia, the Euro Area, Japan and South Korea) also have similarly large cycles. By comparing the short-term (i.e. month-to-month) volatility of New Zealand’s exchange rate to other economies, on a trade-weighted basis New Zealand’s exchange rate fluctuates greatly. New Zealand, Australia and Japan face the highest levels of short-term volatility out of the economies included in the analysis. Factors that affect the expected relative return on New Zealand dollar assets are found to explain a significant part of exchange rate cycles. These include interest rate differentials between New Zealand and other countries, relative growth performance and attitudes to risk. More fundamental drivers such as export commodity prices and the terms of trade, and productivity growth also drive New Zealand dollar returns. The main driver of the exchange rate changes over time in response to developments in the domestic and global economy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 10/10.
Date of creation: Dec 2010
Date of revision:
Contact details of provider:
Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
Phone: +64-4-472 2733
Fax: +64-4-473 0982
Web page: http://www.treasury.govt.nz
More information through EDIRC
Exchange rate; short-term volatility; medium-term cycles; long-run equilibrium;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Harding, Don & Pagan, Adrian, 2002.
"Dissecting the cycle: a methodological investigation,"
Journal of Monetary Economics,
Elsevier, vol. 49(2), pages 365-381, March.
- Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
- Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
- Anne-Marie Brook & David Hargreaves, 2000. "A macroeconomic balance measure of New Zealand's equilibrium exchange rate," Reserve Bank of New Zealand Discussion Paper Series DP2000/09, Reserve Bank of New Zealand.
- William R. Cline & John Williamson, 2010. "Currency Wars?," Policy Briefs PB10-26, Peterson Institute for International Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Web and Publishing Team, The Treasury).
If references are entirely missing, you can add them using this form.