The New Zealand dollar and milk prices

Abstract

This paper explores the association between the nominal and real exchange rate of the New Zealand dollar against US dollar and the price of milk, using daily data spanning the period 2000–2011. Through the error correction model approach and the generalised autoregressive heteroskedastic approach, applied both over the entire period and across the exchange rate cycle, the empirical findings suggest that there is evidence in favour of a relationship between the exchange rate and the price of milk, in terms of means and conditional volatilities, with certain differentiations across the exchange rate cycle. The results are important, in terms of information availability, for milk producers, exporters, monetary policymakers, hedge funds managers and international portfolio managers. Moreover, they provide additional support to the hypothesis that both markets are driven by the same information sets.