IDEAS home Printed from https://ideas.repec.org/p/nzt/nztwps/14-12.html
   My bibliography  Save this paper

Examining the Elasticity of New Zealand’s Current Account to the Real Exchange Rate

Author

Listed:

Abstract

The main purpose of this paper is to supplement the existing literature by quantifying the elasticity of New Zealand’s current account to changes in the real exchange rate. The unusual composition of New Zealand’s current account balance – particularly the large income deficit and the importance of the agricultural sector to the goods balance – suggests that this relationship for New Zealand may differ from that for other developed countries. As a result, we focus on modelling the relationship between New Zealand’s exchange rate and the current account stripped of four main components: the net investment income balance, dairy exports, the value of both oil exports and imports, and education services exports: what we call the ‘adjusted’ balance. We find that the responsiveness of New Zealand’s current account to the real exchange rate is towards the lower end of most estimates used in other studies. Given that the trade elasticity is a key variable in macro-balance models of exchange rate valuation, we conclude that some previous studies may have underestimated the magnitude of the real exchange rate adjustment needed to help achieve external equilibrium in the long run.

Suggested Citation

  • 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.
    • Handle: RePEc:nzt:nztwps:14/12
    as

    Download full text from publisher

    File URL: https://treasury.govt.nz/sites/default/files/2014-09/wp-14-12.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Campa, Jose M. & Goldberg, Linda S., 2002. "Exchange rate pass-through into import prices: A macro or micro phenomenon?," IESE Research Papers D/475, IESE Business School.
    2. William R. Cline, 2008. "Estimating Consistent Fundamental Equilibrium Exchange Rates," Working Paper Series WP08-6, Peterson Institute for International Economics.
    3. William R. Cline, 2013. "Estimates of Fundamental Equilibrium Exchange Rates, November 2013," Policy Briefs PB13-29, Peterson Institute for International Economics.
    4. Marilyne Huchet-Bourdon & Jane Korinek, 2012. "Trade Effects of Exchange Rates and their Volatility: Chile and New Zealand," OECD Trade Policy Papers 136, OECD Publishing.
    5. Anne-Marie Brook & David Hargreaves, 2000. "A macroeconomic balance measure of New Zealand's equilibrium exchange rate," Reserve Bank of New Zealand Discussion Paper Series DP2000/09, Reserve Bank of New Zealand.
    6. Simon Wren-Lewis, 2004. "A model of Equilibrium Exchange Rates for the New Zealand and Australian dollar," Reserve Bank of New Zealand Discussion Paper Series DP 2004/07, Reserve Bank of New Zealand.
    7. Gemma Mabin, 2011. "New Zealand's Exchange Rate Cycles: Impacts and Policy," Treasury Working Paper Series 11/01, New Zealand Treasury.
    8. William R. Cline, 2013. "Estimates of Fundamental Equilibrium Exchange Rates, May 2013," Policy Briefs PB13-15, Peterson Institute for International Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kamber, Gunes & McDonald, Chris & Sander, Nick & Theodoridis, Konstantinos, 2016. "Modelling the business cycle of a small open economy: The Reserve Bank of New Zealand's DSGE model," Economic Modelling, Elsevier, vol. 59(C), pages 546-569.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hali Edison & Francis Vitek, 2009. "Exchange rate assessments for Australia and New Zealand," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 1(2), pages 155-176, May.
    2. William R. Cline, 2014. "Estimates of Fundamental Equilibrium Exchange Rates, November 2014," Policy Briefs PB14-25, Peterson Institute for International Economics.
    3. Yin-Wong Cheung & Shi He, 2019. "Truths and Myths About RMB Misalignment: A Meta-analysis," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(3), pages 464-492, September.
    4. MASUJIMA Yuki, 2015. "Assessing Asian Equilibrium Exchange Rates as Policy Instruments," Discussion papers 15038, Research Institute of Economy, Trade and Industry (RIETI).
    5. William R. Cline, 2014. "Estimates of Fundamental Equilibrium Exchange Rates, May 2014," Policy Briefs PB14-16, Peterson Institute for International Economics.
    6. Ms. Hali J Edison & Mr. Francis Vitek, 2009. "Australia and New Zealand Exchange Rates: A Quantitative Assessment," IMF Working Papers 2009/007, International Monetary Fund.
    7. William R. Cline, 2015. "Estimates of Fundamental Equilibrium Exchange Rates, November 2015," Policy Briefs PB15-20, Peterson Institute for International Economics.
    8. Gary W. Williams & Ji Luo, 2017. "Exchange Rate Policy and Global Supply Chains: The Case of the Chinese Renminbi and Global Soybean and Soybean Product Markets," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 39(1), pages 177-198.
    9. Caroline Freund, 2014. "Rethinking the National Export Initiative," Policy Briefs PB14-7, Peterson Institute for International Economics.
    10. Jose De Gregorio, 2015. "From Rapid Recovery to Slowdown: Why Recent Economic Growth in Latin America Has Been Slow," Policy Briefs PB15-6, Peterson Institute for International Economics.
    11. Juan Carlos Martinez Oliva, 2014. "Moving Towards Monetary Integration in East Asia: Achieving Economic Convergence in a Game-Theory Framework," China Economic Policy Review (CEPR), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-24.
    12. Luo, Ji & Williams, Gary W., 2015. "The Impacts of Chinese Exchange Rate Policy on World Soybean and Products Markets," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205075, Agricultural and Applied Economics Association.
    13. Joseph E. Gagnon, 2014. "Alternatives to Currency Manipulation: What Switzerland, Singapore, and Hong Kong Can Do," Policy Briefs PB14-17, Peterson Institute for International Economics.
    14. C. Fred Bergsten, 2014. "Addressing Currency Manipulation Through Trade Agreements," Policy Briefs PB14-2, Peterson Institute for International Economics.
    15. Banerjee, Krittika & Goyal, Ashima, 2021. "Behavioural​ equilibrium real exchange rates and misalignments: Evidence from large emerging markets," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 414-436.
    16. William R. Cline, 2013. "Estimates of Fundamental Equilibrium Exchange Rates, November 2013," Policy Briefs PB13-29, Peterson Institute for International Economics.
    17. N/A, 2007. "Real Convergence, Price Level Convergence and Inflation in Europe," Bruegel Working Papers 267, Bruegel.
    18. Saadaoui, Jamel, 2012. "Global Imbalances: Should We Use Fundamental Equilibrium Exchange Rates?," MPRA Paper 42554, University Library of Munich, Germany.
    19. Maurice Obstfeld, 2002. "Inflation-Targeting, Exchange-Rate Pass-Through, and Volatility," American Economic Review, American Economic Association, vol. 92(2), pages 102-107, May.
    20. Aliyu, Shehu Usman Rano & Yakub, Ma'aji Umar & Sanni, Ganiyu Kayode & Duke, Omolara, 2009. "Exchange Rate Pass-through in Nigeria: Evidence from a Vector Error Correction Model," MPRA Paper 25053, University Library of Munich, Germany, revised 29 Mar 2010.

    More about this item

    Keywords

    Current account elasticity; exchange rate;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nzt:nztwps:14/12. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CSS I&T Web & Publishing, The Treasury (email available below). General contact details of provider: https://edirc.repec.org/data/tregvnz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.
    pFad - Phonifier reborn

    Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

    Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


    Alternative Proxies:

    Alternative Proxy

    pFad Proxy

    pFad v3 Proxy

    pFad v4 Proxy