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Exchange Rates, Non‐Traded Goods and the Terms Of Trade: An Empirical Application for New Zealand[Note 1. We wish to thank Catherine Connolly for research assistance ...]
Author(s) -
Hansen Eric,
Hutchison Michael M.
Publication year - 1997
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/1468-0084.00049
Subject(s) - cointegration , econometrics , exchange rate , economics , context (archaeology) , convergence (economics) , representation (politics) , sample (material) , error correction model , series (stratigraphy) , macroeconomics , thermodynamics , paleontology , physics , politics , political science , law , biology
This article formulates and tests for New Zealand a model of exchange rate determination focusing on non‐tradeable goods and terms‐of‐trade shifts. We emphasize the equilibrium properties of this framework and, in this context, estimate an error correction model where adjustment in response to deviation from equilibrium is an important determinant of short‐run exchange rate movements. We estimate the model using a new data series on the supply of non‐tradeable goods. The model has desirable empirical characteristics, including a plausible error correction equation, strong support for cointegration and rapid convergence to the long‐run equilibrium. Moreover, a variety of diagnostic statistics, including parameter stability tests andout‐of‐sample forecasting performance, indicate the equation is a parsimonious representation of the data. These results provide considerable support for the emphasis on ‘real’ determinants of nominal exchange rates, in this case fluctuations in non‐traded goods supply and terms‐of‐trade.