The impact of Inflation and Oil price on Exchange rate for (1977 – 2019): Evidence from New Zealand

Abstract

< p>The exchange rate movements have been found with impacts on macroeconomic variables empirically. This paper aims to analyse the impact of three identified macroeconomic variables (oil price, inflation, economic growth) on the exchange rate in New Zealand. This study uses the secondary data available at the Central Bank of New Zealand and has included data only for a time from1977 to 2016. The exogenous variables included in this study are oil price, inflation, and economic growth while the exchange rate is the endogenous variable. The value at risk (VAR) model has been found best suited for the purpose of our study because it allows time series analysis. It was found that there was negative impact of inflation on NZ Dollar, but it was quantitatively significant because 1 % increase in CPI resulted in 0.505% depreciation in the exchange rate. The oil price was found with positive impact on NZ Dollar value because 1 % appreciation in the oil price resulted in 0.117 % depreciation in NZ Dollar. Also, the significant impact of GDP growth on the exchange rate was found when 1% increase in GDP caused 0.568% appreciation in exchange rate. These findings suggest that the selected macroeconomic variables produced statistically significant impact on the exchange rate.