Australia’s Medium-run Exchange Rate: A Macroeconomic Balance Approach
We analyse the determinants of Australia’s exchange rate in terms of the approach introduced by Williamson (1983), based on the simultaneous attainment of internal and external balance. Internal balance implies that the economy is operating at its supply potential with no inflationary pressures. External balance is characterised as the sustainable net flow of resources (corresponding to a current account to GDP ratio) between countries when they are in internal balance. The approach provides estimates of the medium-term exchange rate associated with a given current account position, although the estimates are highly sensitive to variations in key parameters.
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