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The Equilibrium Exchange Rate in a Bayesian State-Space Model: An Application to Australia

Listed author(s):
  • Martin Melecky

    (School of Economics, University of New South Wales)

The equilibrium exchange rate is a closely scrutinized variable in international finance and monetary economics. A model to estimate an equilibrium exchange rate is proposed in this paper. It consists of several building blocks: a state-space structure, uncovered interest parity and the equilibrium exchange rate determinants. Prior information about the impact of the determinants is used when Bayesian estimation of the model is carried out. The estimates reveal that on average the Australian dollar was overvalued by about 3 percent during the period 1984-2004. The major overvaluations of the AUD/USD exchange rate took place during the period 1986-1988, and around the years 1990, and 2003. The information content of the acquired estimates of exchange rate misalignments appears to be superior to the purchasing parity equivalent.

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Paper provided by EconWPA in its series International Finance with number 0505005.

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Length: 25 pages
Date of creation: 07 May 2005
Handle: RePEc:wpa:wuwpif:0505005
Note: Type of Document - pdf; pages: 25
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