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Should the Reserve Bank worry about the exchange rate?

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  • Nguyen, Luan

Abstract

This research paper is focused on estimating a set of parameters for a simple monetarypolicy model of New Zealand and calibrate these parameters to compute viability kernels. We found output gap to be persistent across our sample period. There is weak evidence of a downward sloping IS curve and an upward sloping Phillips curve. The estimation results for thereal exchange rate parameter in the IS equation and the uncovered interest rate parity do notconfirm the theoretical predictions. By calibrating the estimated parameters to our viability analysis, we recommend that the Reserve Bank should not worry about the exchange rate, the OCR be lowered further and increasing the scope of fiscal policy in sharing the burden with monetary policy.

Suggested Citation

  • Nguyen, Luan, 2016. "Should the Reserve Bank worry about the exchange rate?," MPRA Paper 75519, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:75519
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    References listed on IDEAS

    as
    1. David Hargreaves & Andy Brookes & Carrick Lucas & Bruce White, 2000. "Can hedging insulate firms from exchange rate risk," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 63, March.
    2. Daan Steenkamp, 2014. "Measuring New Zealand’s effective exchange rate," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 77, pages 1-15, December.
    3. Marc Klau & San Sau Fung, 2006. "The new BIS effective exchange rate indices," BIS Quarterly Review, Bank for International Settlements, March.
    4. Adam Richardson & Rebecca Williams, 2015. "Estimating New Zealand’s neutral interest rate," Reserve Bank of New Zealand Analytical Notes series AN2015/05, Reserve Bank of New Zealand.
    5. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202, National Bureau of Economic Research, Inc.
    6. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262, National Bureau of Economic Research, Inc.
    7. Richard Fabling & Lynda Sanderson, 2015. "Export Performance, Invoice Currency and Heterogeneous Exchange Rate Pass-through," The World Economy, Wiley Blackwell, vol. 38(2), pages 315-339, February.
    8. Gemma Mabin, 2011. "New Zealand's Exchange Rate Cycles: Impacts and Policy," Treasury Working Paper Series 11/01, New Zealand Treasury.
    9. Özer Karagedikli & C. John McDermott, 2018. "Inflation expectations and low inflation in New Zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 52(3), pages 277-288, September.
    10. Jacek Krawczyk & Rishab Sethi, 2007. "Satisficing Solutions for New Zealand Monetary Policy," Reserve Bank of New Zealand Discussion Paper Series DP2007/03, Reserve Bank of New Zealand.
    11. David Hargreaves & Bruce White, 1999. "Measures of New Zealand's effective exchange rate," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, September.
    12. Jacek Krawczyk & Kunhong Kim, 2014. "Viable Stabilising Non-Taylor Monetary Policies for an Open Economy," Computational Economics, Springer;Society for Computational Economics, vol. 43(2), pages 233-268, February.
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    More about this item

    Keywords

    Monetary policy; Viability theory; Viability kernels; Central bank; Real exchange rate;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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