Extending the Reserve Bank's macroeconomic balance model of the exchange rate

Release date
02/10/2012
Reference
AN2012/08
Authors
James Graham; Daan Steenkamp
ISSN
2230‐5505
The exchange rate matters a lot in New Zealand and the Reserve Bank uses several different models, each imprecise, to analyse it. This note focuses on just one of those approaches: the macro-balance model of the exchange rate. We use that model to estimate the exchange rate which, if sustained, would stabilise at around current levels the negative net international investment position (as a percentage of GDP). The sensitivity of the model estimates to some of the key assumptions is illustrated.