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Exchange rates, non-traded goods and the terms-of-trade: an empirical application for New Zealand

Author

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  • Eric Hansen
  • Michael Hutchison

Abstract

This article formulates and tests for New Zealand a model of exchange rate determination focusing on non-tradeable goods and terms-of-trade shifts. We emphasize the equilibrium properties of this framework and, in this context, estimate an error correction model where adjustment in response to deviation from equilibrium are an important determinant of short-run exchange rate movements. ; We estimate the model using a new data series on the supply of non-tradeable goods. The model has desirable empirical characteristics, including a plausible error correction equation, strong support for cointegration and rapid convergence to the long-run equilibrium. Moreover, a variety of diagnostic statistics, including parameter stability tests and out-of-sample forecasting performance, indicate the equation is a parsimonious representation of the data. These results provide considerable support for the emphasis on "real" determinants of nominal exchange rates, in this case fluctuations in non-traded goods supply and terms-of-trade.

Suggested Citation

  • Eric Hansen & Michael Hutchison, 1995. "Exchange rates, non-traded goods and the terms-of-trade: an empirical application for New Zealand," Pacific Basin Working Paper Series 95-01, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfpb:95-01
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    Cited by:

    1. Debabrata Bagchi & Georgios E. Chortareas & Stephen M. Miller, 2004. "The Real Exchange Rate in Small, Open, Developed Economies: Evidence from Cointegration Analysis," The Economic Record, The Economic Society of Australia, vol. 80(248), pages 76-88, March.
    2. Economics Department, 1995. "Recent Reserve Bank research," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 58, September.
    3. Robert A Buckle & Kunhong Kim & Heather Kirkham & Nathan McLellan & Jared Sharma, 2002. "A structural VAR model of the New Zealand business cycle," Treasury Working Paper Series 02/26, New Zealand Treasury.

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