Sources of Exchange Rate and Price Level Fluctuations in Two Commodity Exporting Countries: Australia and New Zealand*

Abstract

Dynamic interactions between the exchange rate, domestic price level and terms of trade of Australia and New Zealand, relative to the United States, are evaluated. Under the restriction that a nominal shock has no long‐run effect on the relative terms of trade, real shocks dominate nominal shocks in accounting for fluctuations in real and nominal exchange rates. For Australia, real shocks that improve the relative terms of trade have a negligible effect on the domestic price level relative to that of the United States but, for New Zealand, there is a significant permanent increase in the relative domestic price level.

How well does the Mundell-Fleming model fit Australian data since the collapse of Bretton Woods?

“…The nominal exchange rate appreciates permanently in response to the IS shock. This is consistent with Fisher (1996) who investigates movements in Australian nominal and real exchange rates. Karras (1993) and Kim (1994) also reach the conclusion that a positive IS shock results in a permanent appreciation of the nominal exchange rate for the US.…”

“…This ® nding is consistent with the equilibrium theory of exchange rate determination (Stockman, 1987(Stockman, , 1988 that emphasizes the importance of real shocks as opposed to monetary shocks. Fisher (1996) also ® nds that real shocks are the major determinant of movements in the Australian nominal exchange rate as does Lastrapes (1992) for several major industrial economies. In Table 1, the aggregate supply shock explains none of the forecast error variance of the nominal exchange rate while IS shocks explain at least 64%.…”

Financial Asset Prices and Monetary Policy: Theory and Evidence

“…26 The fact that 24 See Astley and Garrat (1996) and Chadha and Prasad (1996) for an application of this methodology to the United Kingdom and Japan respectively. 25 See, for example, Gruen and Wilkinson (1994) and Fisher (1996) for Australia and Amano and van Norden (1996) for Canada. 26 The greater relevance of the terms of trade for the exchange rate in Australia is also confirmed by the cointegration analysis presented in Table A1, which reports some basic statistics on the exchange rate, terms-of-trade and price series used.…”

Is there any Link Between Commodity Price and Monetary Policy? Evidence from Australia

“…despite this important role of commodity price in the Australian economy scant attention has been given to examine its role in operating monetary policy. Although commodity price has been subjected to research in a number of studies in the context of Australian economy, such as Sapsford (1990), Fisher (1996), Bloch et al (2006) and so on, its role in the operation of monetary policy has not yet been examined. The present paper attempts to utilize this research gap and investigate if commodity price can be of any use in the conduct of monetary policy in Australia.…”