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The equilibrium exchange rate according to PPP and UIP

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This paper uses Purchasing Power Parity (PPP) and Uncovered Interest Rate Parity (UIP) to estimate a time-varying equilibrium for the $NZ/$US nominal exchange rate over the period 1992 to 2003. While PPP is supported, the data does not support the strictest form of UIP. The estimated equilibrium can be considered a Behavioural Equilibrium Exchange Rate (BEER) that is conditional on interest rates and price levels. The large swings in New Zealand's exchange rate during the 1990s were broadly consistent with the estimated conditional equilibrium, while the equally large swings in the exchange rate since 2000 were moves away from the conditional equilibrium. This may be because some factor other than interest rates or price levels has driven the exchange rate away from the conditional equilibrium since 2000. Alternatively, the long-run relationship between interest rates and the exchange rate may have changed since the 1990s.

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  • Dominick Stephens, 2004. "The equilibrium exchange rate according to PPP and UIP," Reserve Bank of New Zealand Discussion Paper Series DP 2004/03, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbdps:2004/03
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    Cited by:

    1. Dominick Stephens, 2006. "Should monetary policy attempt to reduce exchange rate volatility in New Zealand?," Reserve Bank of New Zealand Discussion Paper Series DP2006/05, Reserve Bank of New Zealand.
    2. Pavel Trunin & Dmitriy Kniazev & Ekaterina Kuduykina, 2010. "Perspective issues in the CBR`s exchange rate policy," Research Paper Series, Gaidar Institute for Economic Policy, issue 144P.
    3. Rashid, Abdul & Ling, Jeffrey, 2009. "Fundamentals and Exchange Rates: Evidence from ASEAN-5," MPRA Paper 22451, University Library of Munich, Germany.
    4. Macchiarelli, Corrado, 2014. "Bond market co-movements, expected inflation and the GBP-USD equilibrium real exchange rate," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 242-256.
    5. Andrea Salazar-Díaz & Aarón Levi Garavito-Acosta & Sergio Restrepo Ángel & Leidy Viviana Arcila-Agudelo, 2023. "Real Equilibrium Exchange Rate in Colombia: Thousands of VEC Models Approach," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 99, pages 33-78, July-Dece.
    6. Grossmann, Axel & Orlov, Alexei G., 2022. "Exchange rate misalignments, capital flows and volatility," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    7. Gustavo Adolfo Díaz Valencia, 2013. "El trilema de la política monetaria en Colombia no se cumple," Revista CIFE, Universidad Santo Tomás, June.
    8. Jaramillo Franco, Miguel & Serván Lozano, Sergio, 2012. "Modeling exchange rate dynamics in Peru: A cointegration approach using the UIP and PPP," MPRA Paper 70772, University Library of Munich, Germany.
    9. Beirne, John & Bijsterbosch, Martin, 2011. "Exchange rate pass-through in central and eastern European EU Member States," Journal of Policy Modeling, Elsevier, vol. 33(2), pages 241-254, March.
    10. James Zuccollo & Sholeh Maani & Bill Kaye-Blake & Lulu Zeng, 2013. "Private Returns to Tertiary Education - How Does New Zealand Compare to the OECD?," Treasury Working Paper Series 13/10, New Zealand Treasury.
    11. Axel Grossmann & Marc Simpson & Teofilo Ozuna, 2014. "Investigating the PPP hypothesis using constructed U.S. dollar equilibrium exchange rate misalignments over the post-bretton woods period," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(2), pages 235-268, April.
    12. Michael Ryan & Kam Leong Szeto, 2009. "An Introduction to the New Zealand Treasury Model," Treasury Working Paper Series 09/02, New Zealand Treasury.
    13. Anella Munro, 2005. "UIP, Expectations and the Kiwi," Reserve Bank of New Zealand Discussion Paper Series DP2005/05, Reserve Bank of New Zealand.
    14. Grossmann, Axel & Paul, Chris & Simpson, Marc W., 2017. "The impact of exchange rate deviations from relative PPP equilibrium on the U.S. demand for foreign equities," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 57-76.

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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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