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Australia's Real Exchange Rate--Is It Explained by the Terms of Trade or by Real Interest Differentials?

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  • Gruen, David W R
  • Wilkinson, Jenny

Abstract

The authors find weak evidence of a stable relationship between the Australian real exchange rate and the terms of trade from 1969 to 1990. Since the float, the terms of trade and long real interest differentials together help to explain the real exchange rate. The authors' best estimates are that a real exchange rate appreciation of about 0.3 to 0.5 percent is associated with a one percent improvement in the terms of trade, while an appreciation of about 2 to 3.5 percent is associated with an increase of one percentage point in the differential between Australian and world long real interest rates. Copyright 1994 by The Economic Society of Australia.

Suggested Citation

  • Gruen, David W R & Wilkinson, Jenny, 1994. "Australia's Real Exchange Rate--Is It Explained by the Terms of Trade or by Real Interest Differentials?," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 204-219, June.
    • Handle: RePEc:bla:ecorec:v:70:y:1994:i:209:p:204-19
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