Discussion paper released

Discussion paper released

For your information the Reserve Bank has released the following discussion paper.

The equilibrium exchange rate according to PPP and UIP

by Dominick Stephens

This paper uses Purchasing Power Parity (PPP) and Uncovered Interest Rate Parity (UIP) to estimate a time-varying equilibrium for the $NZ/$US nominal exchange rate over the period 1992 to 2003.

While PPP is supported, the data does not support the strictest form of UIP. The estimated equilibrium can be considered a Behavioural Equilibrium Exchange Rate (BEER) that is conditional on interest rates and price levels.

The large swings in New Zealand's exchange rate during the 1990s were broadly consistent with the estimated conditional equilibrium, while the equally large swings in the exchange rate since 2000 were moves away from the conditional equilibrium. This may be because some factor other than interest rates or price levels has driven the exchange rate away from the conditional equilibrium since 2000.

Alternatively, the long-run relationship between interest rates and the exchan To read the paper click on the link below http://www.rbnz.govt.nz/research/discusspapers/dp04_03.pdf

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