PPP-based analysis of New Zealand's equilibrium exchange rate
We use two alternative methodologies to estimate an equilibrium value for the USD/NZD bilateral exchange rate. A cross-country comparison of prices for individual goods, augmented with a Balassa-Samuelson variable suggests that the New Zealand dollar was close to fairly valued in 1999, but undervalued by slightly more than 10 per cent in 2000. Equilibrium was estimated at roughly US$0.52. The second methodology uses dynamic OLS and panel dynamic OLS, to test for a cointegrating relationship between the nominal exchange rate and relative prices, as well as a number of other possible explanatory variables. Using a long sample period for New Zealand, we find some tentative evidence of a stable PPP relationship for the USD/NZD bilateral exchange rate, and this model suggests that the equilibrium value of the dollar is roughly US$0.60. However, the results are very sensitive to the sample period, and in most specifications, particularly those that incorporate the recent depreciation in the New Zealand dollar, the data are unsupportive of a long-run PPP relationship. Therefore, the results should be interpreted with caution.
|Date of creation:||Jul 2001|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 64 4 471-3767
Fax: 64 4 471-2270
Web page: http://www.rbnz.govt.nz
More information through EDIRC
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.:
- Jeffrey A. Frankel and Andrew K. Rose., 1995.
"A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries,"
Center for International and Development Economics Research (CIDER) Working Papers
C95-052, University of California at Berkeley.
- Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February.
- Jeffrey A. Frankel & Andrew K. Rose, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," NBER Working Papers 5006, National Bureau of Economic Research, Inc.
- Frankel, Jeffrey A & Rose, Andrew K, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," CEPR Discussion Papers 1128, C.E.P.R. Discussion Papers.
- Peter C.B. Phillips & Sam Ouliaris, 1987.
"Asymptotic Properties of Residual Based Tests for Cointegration,"
Cowles Foundation Discussion Papers
847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
- Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- Ronald Macdonald, 1995.
"Long-Run Exchange Rate Modeling: A Survey of the Recent Evidence,"
IMF Staff Papers,
Palgrave Macmillan, vol. 42(3), pages 437-489, September.
- Ronald MacDonald, 1995. "Long-Run Exchange Rate Modeling; A Survey of the Recent Evidence," IMF Working Papers 95/14, International Monetary Fund.
- Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation for Research in Economics, Yale University, revised Apr 1989.
- MacDonald, Ronald, 2000. "Concepts to Calculate Equilibrium Exchange Rates: An Overview," Discussion Paper Series 1: Economic Studies 2000,03, Deutsche Bundesbank, Research Centre.
- Stefano Scarpetta & Andrea Bassanini & Dirk Pilat & Paul Schreyer, 2000. "Economic Growth in the OECD Area: Recent Trends at the Aggregate and Sectoral Level," OECD Economics Department Working Papers 248, OECD Publishing.
- repec:cup:etheor:v:7:y:1991:i:1:p:1-21 is not listed on IDEAS
- Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(01), pages 1-21, March.
- Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
When requesting a correction, please mention this item's handle: RePEc:nzb:nzbdps:2001/01. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reserve Bank of New Zealand Knowledge Centre)
If references are entirely missing, you can add them using this form.