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Australia's Real Exchange Rate–Is it Explained by the Terms of Trade or by Real Interest Differentials? *
Author(s) -
GRUEN DAVID W. R.,
WILKINSON JENNY
Publication year - 1994
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.1994.tb01839.x
Subject(s) - float (project management) , economics , differential (mechanical device) , exchange rate , real interest rate , point (geometry) , international economics , interest rate , econometrics , monetary economics , mathematics , geometry , management , engineering , aerospace engineering
We find weak evidence of a stable relationship between the Australian real exchange rate and the terms of trade from 1969 to 1990. Since the float, the terms of trade and long real interest differentials together help to explain the real exchange rate. Our best estimates are that a real exchange rate appreciation of about 0.3 to 0.5 per cent is associated with a 1 per cent improvement in the terms of trade, while an appreciation of about 2 to 3½ per cent is associated with an increase of 1 percentage point in the differential between Australian and world long real interest rates.