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Comparing Capital‐ and Trade‐weighted Measures of Australia’s Effective Exchange Rate
Author(s) -
Makin Tony,
Robson Alex
Publication year - 1999
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.00072
Subject(s) - economics , exchange rate , currency , liberian dollar , capital flows , monetary economics , effective exchange rate , capital (architecture) , interest rate parity , investment (military) , international economics , finance , microeconomics , profit (economics) , archaeology , history , politics , law , political science
Effective exchange‐rate overvaluation is considered a leading indicator of currency crises. Yet, existing measures of nominal and real effective exchange rates focus on international trade in goods and neglect the importance of international trade in assets. This article develops a range of alternative effective exchange‐rate indices for the Australian dollar, based mostly on international investment stocks and flows. Capital‐weighted exchange‐rate measures of the Australian dollar, in nominal and real terms, reveal a stronger exchange rate over recent decades than suggested by the standard measure. Similar measures for other currencies could improve understanding of exchange‐rate behaviour.