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Australia’s Medium-run Exchange Rate: A Macroeconomic Balance Approach

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Author Info
Nikola Dvornak (Reserve Bank of Australia)
Marion Kohler (Reserve Bank of Australia)
Gordon Menzies (Reserve Bank of Australia)

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Abstract

We analyse the determinants of Australia’s exchange rate in terms of the approach introduced by Williamson (1983), based on the simultaneous attainment of internal and external balance. Internal balance implies that the economy is operating at its supply potential with no inflationary pressures. External balance is characterised as the sustainable net flow of resources (corresponding to a current account to GDP ratio) between countries when they are in internal balance. The approach provides estimates of the medium-term exchange rate associated with a given current account position, although the estimates are highly sensitive to variations in key parameters.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2003-03.

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Date of creation: Mar 2003
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Handle: RePEc:rba:rbardp:rdp2003-03

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Related research
Keywords: current account; equilibrium exchange rates; terms of trade;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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References listed on IDEAS
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.:
  1. Hamid Faruqee & Peter Isard, 1998. "Exchange Rate Assessment: Extension of the Macroeconomic Balance Approach," IMF Occasional Papers 167, International Monetary Fund.
  2. MacDonald, Ronald, 2000. "Concepts to calculate equilibrium exchange rates : an overview," Discussion Paper Series 1: Economic Studies 2000,03, Deutsche Bundesbank, Research Centre. [Downloadable!]
  3. Gordon Menzies, 1994. "Explaining the Timing of Australia's Manufactured Export Boom," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 27(4), pages 72-86. [Downloadable!] (restricted)
  4. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February. [Downloadable!] (restricted)
  5. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  6. Malcolm Edey & Elaine Kerrison & Gordon Menzies, . "Transmission of External Shocks in the RBII Model," RBA Research Discussion Papers rdp8710, Reserve Bank of Australia.
  7. Adrian Blundell-Wignall & Jerome Fahrer & Alexandra Heath, 1993. "Major Influences on the Australian Dollar Exchange Rate," RBA Annual Conference Volume, in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia. [Downloadable!]
  8. Alison Tarditi, 1996. "Modelling the Australian Exchange Rate, Long Bond Yield and Inflationary Expectations," RBA Research Discussion Papers rdp9608, Reserve Bank of Australia. [Downloadable!]
  9. Hamid Faruqee & Martin Fetherston & Peter Isard & G. Russell Kincaid, 2001. "Methodology for Current Account and Exchange Rate Assessments," IMF Occasional Papers 209, International Monetary Fund.
  10. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November. [Downloadable!] (restricted)
  11. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier. [Downloadable!] (restricted)
  12. Luci Ellis, 2001. "Measuring the Real Exchange Rate: Pitfalls and Practicalities," RBA Research Discussion Papers rdp2001-04, Reserve Bank of Australia. [Downloadable!]
  13. David Gruen & Tim Robinson & Andrew Stone, 2002. "Output Gaps in Real Time: Are They Reliable Enough to Use for Monetary Policy?," RBA Research Discussion Papers rdp2002-06, Reserve Bank of Australia. [Downloadable!]
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Cited by:
(explanations, 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.)

  1. David Norman, 2006. "Modelling Manufactured Exports: Evidence from Australian States," RBA Research Discussion Papers rdp2006-01, Reserve Bank of Australia. [Downloadable!]
  2. Rebecca L Driver & Peter F Westaway, . "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England. [Downloadable!]
  3. Rochelle Belkar & Lynne Cockerell & Christopher Kent, 2007. "Current Account Deficits: The Australian Debate," Working Papers Central Bank of Chile 450, Central Bank of Chile. [Downloadable!]
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