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Australia’s Medium-run Exchange Rate: A Macroeconomic Balance Approach

Author

Listed:
  • Nikola Dvornak

    (Reserve Bank of Australia)

  • Marion Kohler

    (Reserve Bank of Australia)

  • Gordon Menzies

    (Reserve Bank of Australia)

Abstract

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.

Suggested Citation

  • Nikola Dvornak & Marion Kohler & Gordon Menzies, 2003. "Australia’s Medium-run Exchange Rate: A Macroeconomic Balance Approach," RBA Research Discussion Papers rdp2003-03, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2003-03
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    References listed on IDEAS

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    6. Luci Ellis, 2001. "Measuring the Real Exchange Rate: Pitfalls and Practicalities," RBA Research Discussion Papers rdp2001-04, Reserve Bank of Australia.
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    Cited by:

    1. Hali J Edison & Francis Vitek, 2009. "Australia and New Zealand Exchange Rates; A Quantitative Assessment," IMF Working Papers 09/7, International Monetary Fund.
    2. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
    3. Tim Atkin & Ellis Connolly, 2013. "Australian Exports: Global Demand and the High Exchange Rate," RBA Bulletin, Reserve Bank of Australia, pages 1-10, June.
    4. David Norman, 2006. "Modelling Manufactured Exports: Evidence from Australian States," RBA Research Discussion Papers rdp2006-01, Reserve Bank of Australia.
    5. Gordon D. Menzies, 2005. "Who'S Afraid Of The Marshall-Lerner Condition?," Economic Papers, The Economic Society of Australia, vol. 24(4), pages 309-315, December.
    6. Hali Edison & Francis Vitek, 2009. "Exchange rate assessments for Australia and New Zealand," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 1(2), pages 155-176, May.
    7. Rochelle Belkar & Lynne Cockerell & Christopher Kent, 2008. "Current Account Deficits: Tha Australian Debate," Central Banking, Analysis, and Economic Policies Book Series,in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmidt- (ed.), Current Account and External Financing, edition 1, volume 12, chapter 13, pages 491-535 Central Bank of Chile.
    8. Simon Wren-Lewis, 2004. "A model of Equilibrium Exchange Rates for the New Zealand and Australian dollar," Reserve Bank of New Zealand Discussion Paper Series DP 2004/07, Reserve Bank of New Zealand.
    9. Jonathan Hambur & Lynne Cockerell & Christopher Potter & Penelope Smith & Michelle Wright, 2015. "Modelling the Australian Dollar," RBA Research Discussion Papers rdp2015-12, Reserve Bank of Australia.

    More about this item

    Keywords

    current account; equilibrium exchange rates; terms of trade;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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