 PPP-based analysis of New Zealand's equilibrium exchange rateAnne-Marie Brook and David Hargreaves No DP2001/01, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand Abstract: We use two alternative methodologies to estimate an equilibrium value for the USD/NZD bilateral exchange rate. A cross-country comparison of prices for individual goods, augmented with a Balassa-Samuelson variable suggests that the New Zealand dollar was close to fairly valued in 1999, but undervalued by slightly more than 10 per cent in 2000. Equilibrium was estimated at roughly US$0.52. The second methodology uses dynamic OLS and panel dynamic OLS, to test for a cointegrating relationship between the nominal exchange rate and relative prices, as well as a number of other possible explanatory variables. Using a long sample period for New Zealand, we find some tentative evidence of a stable PPP relationship for the USD/NZD bilateral exchange rate, and this model suggests that the equilibrium value of the dollar is roughly US$0.60. However, the results are very sensitive to the sample period, and in most specifications, particularly those that incorporate the recent depreciation in the New Zealand dollar, the data are unsupportive of a long-run PPP relationship. Therefore, the results should be interpreted with caution. JEL-codes: F31 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:nzb:nzbdps:2001/01 Access Statistics for this paper More papers in Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand Contact information at EDIRC. |
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