Ppp-Based Analysis of New Zealand'S Equilibrium Exchange Rate

Reserve Bank of New Zealand Discussion Paper No. DP2001/01

18 Pages Posted: 19 Nov 2003

See all articles by David Hargreaves

David Hargreaves

Government of New Zealand - Department of Economics

Anne-Marie Brook

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Date Written: July 2001

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 Classification: F31

Suggested Citation

Hargreaves, David and Brook, Anne-Marie, Ppp-Based Analysis of New Zealand'S Equilibrium Exchange Rate (July 2001). Reserve Bank of New Zealand Discussion Paper No. DP2001/01. Available at SSRN: https://ssrn.com/abstract=320296 or http://dx.doi.org/10.2139/ssrn.320296

David Hargreaves (Contact Author)

Government of New Zealand - Department of Economics ( email )

2 The Terrace
P.O. Box 2498
Wellington
New Zealand

Anne-Marie Brook

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

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