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New Zealand's Exchange Rate Cycles: Impacts and Policy

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Abstract

This paper explores the impact of New Zealand’s exchange rate variability on the tradable sector, and policy options for dampening exchange rate variability. It finds that exchange rate variability in the medium term is likely to have a negative impact on the tradable sector. However, the link between exchange rate variability and the performance of the tradable sector is not automatic; many factors are at work. New Zealand’s tradable and non-tradable sector trends are mirrored in some other countries with varying degrees of exchange rate variability. This suggests that exchange rate variability may explain part of the story as to why New Zealand’s tradable sector has underperformed, but it cannot tell the whole story. This paper recognises the significant negative impact that a sustained high level of the exchange rate can have on the tradable sector. There are no easy or obvious ways to reduce exchange rate variability without some costs. This paper first explores alternative exchange rate regimes, and finds that the freely- floating exchange rate regime is still the most appropriate for New Zealand. Second, this paper explores ways to reduce exchange rate variability within the existing framework. While there are no silver bullets available to reduce exchange rate variability within the existing framework, fiscal policy and housing policy are worth pursuing in this respect, with the possibility for macro-prudential policy to play a small role in stabilising the cycle.

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  • Gemma Mabin, 2011. "New Zealand's Exchange Rate Cycles: Impacts and Policy," Treasury Working Paper Series 11/01, New Zealand Treasury.
    • Handle: RePEc:nzt:nztwps:11/01
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    File URL: https://treasury.govt.nz/sites/default/files/2011-03/twp11-01.pdf
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    Cited by:

    1. Gemmell, Norman, 2014. "The Prices of Goods and Services in New Zealand : An International Comparison," Working Paper Series 3276, Victoria University of Wellington, Chair in Public Finance.
    2. Les Oxley & Shangqin Hong & Philip McCann, 2013. "Beyond ‘the Beamer, the boat and the bach’? A Content Analysis-Based Case Study of New Zealand Innovative Firms," Working Papers in Economics 13/12, University of Waikato.
    3. Willy Chetwin & Amy Wood, 2013. "Neutral interest rates in the post-crisis period," Reserve Bank of New Zealand Analytical Notes series AN2013/07, Reserve Bank of New Zealand.
    4. Philip R. Lane, 2011. "External Imbalances and Macroeconomic Policy in New Zealand," The Institute for International Integration Studies Discussion Paper Series iiisdp376, IIIS.
    5. Kam Szeto & David Oxley, 2014. "Examining the Elasticity of New Zealand’s Current Account to the Real Exchange Rate," Treasury Working Paper Series 14/12, New Zealand Treasury.
    6. Philip R. Lane, 2013. "External imbalances and macroeconomic policy," New Zealand Economic Papers, Taylor & Francis Journals, vol. 47(1), pages 53-70, April.
    7. Nguyen, Luan, 2016. "Should the Reserve Bank worry about the exchange rate?," MPRA Paper 75519, University Library of Munich, Germany.

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    More about this item

    Keywords

    Exchange rate; medium-term variability; tradable sector; exchange rate policy; currency union; foreign exchange intervention;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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