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

  • Eric Hansen
  • Michael Hutchison

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.

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Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 95-01.

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Date of creation: 1995
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Publication status: Published in Oxford Bulletin of Economics and Statistics, February 1997, v. 59, iss. 1, pp. 43-67
Handle: RePEc:fip:fedfpb:95-01
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