On the Real Exchange Rate as a Measure of Australia’s External Competitiveness

A.P. Layton and J. McLaren
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J. McLaren: University of Queensland, St. Lucia, QLD

Economic Analysis and Policy, 1991, vol. 21, issue 1, 1-13

Abstract: The use of a country’s real effective exchange rate as a measure of external competitiveness implicitly assumes that, in the long run, purchasing power parity prevails between the country and its trading partners [Dornbusch (1985)]. A testable definition of long run equilibrium existing among non-stationary time series is provided in the recently developed theory of cointegration [Engle and Granger (1987)]. The paper extends earlier U.S. work in this area by Layton and Stark (1990) by investigating the existence of such a long run ‘statistical equilibrium’ between measures of the Australian inflation rate and an effective exchange rate adjusted inflation rate computed from Australia’s major trading partners.

Date: 1991
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