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Working paper

New Zealand's Exchange Rate Cycles: Impacts and Policy (WP 11/01)

Issue date: 
Monday, 14 March 2011
Status: 
Current
Author: 
View point: 
Publication category: 
JEL classification: 
F31 - Foreign Exchange

Formats and related files

This paper explores the impact of New Zealand’s exchange rate variability on the tradable sector, and policy options for dampening exchange rate variability.

Abstract

This paper explores the impact of New Zealand’s exchange rate variability on the tradable sector, and policy options for dampening exchange rate variability. It finds that exchange rate variability in the medium term is likely to have a negative impact on the tradable sector. However, the link between exchange rate variability and the performance of the tradable sector is not automatic; many factors are at work. New Zealand’s tradable and non-tradable sector trends are mirrored in some other countries with varying degrees of exchange rate variability. This suggests that exchange rate variability may explain part of the story as to why New Zealand’s tradable sector has underperformed, but it cannot tell the whole story. This paper recognises the significant negative impact that a sustained high level of the exchange rate can have on the tradable sector.

There are no easy or obvious ways to reduce exchange rate variability without some costs. This paper first explores alternative exchange rate regimes, and finds that the freely-floating exchange rate regime is still the most appropriate for New Zealand. Second, this paper explores ways to reduce exchange rate variability within the existing framework. While there are no silver bullets available to reduce exchange rate variability within the existing framework, fiscal policy and housing policy are worth pursuing in this respect, with the possibility for macro-prudential policy to play a small role in stabilising the cycle.

Data and charts used in this Working Paper are available in a MS Excel file. Using MS Excel Files

Acknowledgements

The author would like to thank Mark Blackmore, Anne-Marie Brook, John Janssen, Paul Gardiner, Michael Reddell and Renee Philip for their substantial input at various stages in the preparation of this paper.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author. They do not necessarily reflect the views of the New Zealand Treasury. The Treasury takes no responsibility for any errors or omissions in, or for the correctness of, the information contained in this Working Paper. The paper is presented not as policy, but to inform and stimulate wider debate.

Last updated: 
Tuesday, 29 March 2011