What happens when the Kiwi flies? Sectoral effects of the exchange rate shocks

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Özer Karagedikli; Michael Ryan; Daan Steenkamp; Tugrul Vehbi
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Karagedikli, Özer, Michael Ryan, Daan Steenkamp and Tugrul Vehbi (2016). ‘What happens when the Kiwi flies? Sectoral effects of exchange rate shocks on the New Zealand economy’, Economic Modelling, Elsevier, Volume 52(Part B), Pages 945-959, DOI: https://doi.org/10.1016/j.econmod.2015.10.034.

We estimate a Factor Augmented Vector autoregression (FAVAR) to identify idiosyncratic exchange rate shocks and examine the effects of these shocks on different sectors of the economy. We find that an unexpected shock to the exchange rate has significant effects on the tradable sector of the economy. While this is expected, the non-tradable sectors of the economy are also influenced by shocks to exchange rate. We argue that one important channel for this influence is the endogenous/cyclical nature of the population dynamics due to permanent and long term migration.