The equilibrium exchange rate according to PPP and UIP
This paper uses Purchasing Power Parity (PPP) and Uncovered Interest Rate Parity (UIP) to estimate a time-varying equilibrium for the $NZ/$US nominal exchange rate over the period 1992 to 2003. While PPP is supported, the data does not support the strictest form of UIP. The estimated equilibrium can be considered a Behavioural Equilibrium Exchange Rate (BEER) that is conditional on interest rates and price levels. The large swings in New Zealand's exchange rate during the 1990s were broadly consistent with the estimated conditional equilibrium, while the equally large swings in the exchange rate since 2000 were moves away from the conditional equilibrium. This may be because some factor other than interest rates or price levels has driven the exchange rate away from the conditional equilibrium since 2000. Alternatively, the long-run relationship between interest rates and the exchange rate may have changed since the 1990s.
|Date of creation:||Apr 2004|
|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.:
- 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.
- Mohammad Hashem Pesaran & Richard J Smith & Yongcheol Shin, 1999.
"Structural analysis of vector error correction models with exogenous I(1) variables,"
ESE Discussion Papers
38, Edinburgh School of Economics, University of Edinburgh.
- Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, vol. 97(2), pages 293-343, August.
- Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics 9706, Faculty of Economics, University of Cambridge.
- Francis X. Diebold & Steven Husted & Mark Rush, 1990.
"Real exchange rates under the gold standard,"
Discussion Paper / Institute for Empirical Macroeconomics
32, Federal Reserve Bank of Minneapolis.
- Froot, Kenneth A. & Rogoff, Kenneth, 1995.
"Perspectives on PPP and long-run real exchange rates,"
Handbook of International Economics,
in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688
- Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
- Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
- Anne-Marie Brook & David Hargreaves, 2001. "PPP-based analysis of New Zealand's equilibrium exchange rate," Reserve Bank of New Zealand Discussion Paper Series DP2001/01, Reserve Bank of New Zealand.
- Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
- Ronald MacDonald, 2002.
"Modelling the Long-run Real Effective Exchange Rate of the New Zealand Dollar,"
Australian Economic Papers,
Wiley Blackwell, vol. 41(4), pages 519-537, December.
- Ronald MacDonald, 2001. "Modelling the long-run real effective exchange rate of the New Zealand Dollar," Reserve Bank of New Zealand Discussion Paper Series DP2002/02, Reserve Bank of New Zealand.
- Jun Nagayasu & Ronald MacDonald, 1999.
"The Long-Run Relationship Between Real Exchange Rates and Real Interest Rate Differentials; A Panel Study,"
IMF Working Papers
99/37, International Monetary Fund.
- Ronald MacDonald & Jun Nagayasu, 2000. "The Long-Run Relationship Between Real Exchange Rates and Real Interest Rate Differentials: A Panel Study," IMF Staff Papers, Palgrave Macmillan, vol. 47(1), pages 5.
- Pantula, Sastry G., 1989. "Testing for Unit Roots in Time Series Data," Econometric Theory, Cambridge University Press, vol. 5(02), pages 256-271, August.
- Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
- Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
- Juselius, Katarina, 1995. "Do purchasing power parity and uncovered interest rate parity hold in the long run? An example of likelihood inference in a multivariate time-series model," Journal of Econometrics, Elsevier, vol. 69(1), pages 211-240, September.
When requesting a correction, please mention this item's handle: RePEc:nzb:nzbdps:2004/03. 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.