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Exchange Rates, Non-Traded Goods and the Terms-of-Trade: An Empirical Application for New Zealand

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  • Eric Hansen
  • Michael M. Hutchison

Abstract

This article formulates and tests for New Zealand a model of exchange rate determination focusing on non-tradeable goods and terms-of-trade shifts. We emphasise the equilibrium properties of this framework and, in this context, estimate an error correction model where adjustment in response to deviation from equilibrium is important determinant of short-run exchange rate movements. We estimate the model using a new data series on the supply of non- tradeable goods. The model has desirable empirical characteristics, including a plausible error correction equation, strong support for cointegration and rapid convergence to the long-run equilibrium. Moreover, a variety of diagnostic statistics, including parameter stability rests and out-of-sample forecasting performance, indicate the equation is a parsimonious representation of the data. These results provide considerable support for the emphasis on "real" determinants of nominal exchange rates, in this case fluctuations in non-traded goods and terms-of trade.

Suggested Citation

  • Eric Hansen & Michael M. Hutchison, "undated". "Exchange Rates, Non-Traded Goods and the Terms-of-Trade: An Empirical Application for New Zealand," EPRU Working Paper Series 96-11, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:epruwp:96-11
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    Cited by:

    1. Robert A Buckle & Kunhong Kim & Heather Kirkham & Nathan McLellan & Jared Sharma, 2002. "A structural VAR model of the New Zealand business cycle," Treasury Working Paper Series 02/26, New Zealand Treasury.
    2. Juha Kilponen & David Mayes & Jouko Vilmunen, 1999. "Labour Market Flexibility in Northern Europe," One Europe or Several? Working Papers 2, One-Europe Programme.
    3. repec:zbw:bofrdp:1999_010 is not listed on IDEAS
    4. Buckle, Robert A. & Kim, Kunhong & Kirkham, Heather & McLellan, Nathan & Sharma, Jarad, 2007. "A structural VAR business cycle model for a volatile small open economy," Economic Modelling, Elsevier, vol. 24(6), pages 990-1017, November.
    5. Mayes, David G. & Vilmunen, Jouko, 1999. "Unemployment in a small open economy: Finland and New Zealand," Bank of Finland Research Discussion Papers 10/1999, Bank of Finland.
    6. Economics Department, 1995. "Recent Reserve Bank research," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 58, September.
    7. Mayes, David G. & Vilmunen, Jouko, 1999. "Unemployment in a small open economy : Finland and New Zealand," Research Discussion Papers 10/1999, Bank of Finland.
    8. Debabrata Bagchi & Georgios E. Chortareas & Stephen M. Miller, 2004. "The Real Exchange Rate in Small, Open, Developed Economies: Evidence from Cointegration Analysis," The Economic Record, The Economic Society of Australia, vol. 80(248), pages 76-88, March.

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