What happens when the Kiwi flies? Sectoral effects of the exchange rate shocks
We estimate a Factor Augmented Vector autoregression (FAVAR) to identify idiosyncratic exchange rate shocks and examine the effects of these shocks on different sectors of the economy. We find that an unexpected shock to the exchange rate has significant effects on the tradable sector of the economy. While this is expected, the non-tradable sectors of the economy are also influenced by shocks to exchange rate. We argue that one important channel for this in influence is the endogenous/cyclical nature of the population dynamics due to permanent and long term migration.
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