Zealand Dollar Research Articles

Legal Problems of Inflation

The article reviews the efforts by Governments, Courts and professional accounting bodies to mitigate the hugely damaging effects of the high inflation of the 1970s and 1980s on the economy and the wider public. The Consumer Price Index brings out that impact recording that in 1990 a New Zealand dollar was worth less than one-eighth its value in 1970.

New Zealand's risk premium

Interest rates in New Zealand are generally higher than in other industrialized economies. Do these higher interest rates imply lower investment and slow growth? I find that high interest rates in New Zealand, through much of the inflation targeting period, appear to have represented compensation for the risk of rare and extreme events, during which the New Zealand dollar was expected to depreciate. Similar factors appear to explain Australia's risk premium, yet Australia has had a higher level of investment and stronger growth. Therefore, I attribute the differing economic performance of the two countries to other structural differences.

The New Zealand dollar and milk prices

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.

Export Performance, Invoice Currency, and Heterogeneous Exchange Rate Pass-Through

Using comprehensive, shipment-level merchandise trade data, we examine the extent to which New Zealand exporters maintain stable New Zealand dollar prices by passing on exchange rate changes to foreign customers. We find that the extent to which firms absorb exchange rate fluctuations in the short run is significantly related to both invoice currency choice and exporter characteristics when these are analysed separately. However, when jointly accounted for, the role of exporter characteristics largely disappears. That is, some firm types are more inclined to invoice in the New Zealand dollar, while others use either the importer or a third currency. In the short run, this translates into differences in exchange rate pass-through because of price rigidity in the invoice currency. Differences across invoice currencies diminish, but do not disappear, over time as prices adjust to reflect bilateral exchange rate movements.

An analysis of extreme movements of exchange rates of the main currencies traded in the Foreign Exchange market

This article analyses the extreme movements of exchange rates of the seven main currencies traded in the Foreign Exchange market against the US dollar: Euro, British pound, Canadian dollar, Japanese Yen, Swiss franc, Australian dollar and New Zealand dollar by using tail index indicators. Payaslioğlu (2009) considers the case of the Turkish exchange rate using the traditional Hill (1975) estimator as a tool. In this article, we employ also an alternative estimator proposed in Iglesias and Linton (2009) that is shown to have, in some cases, improved finite sample properties and it provides substantially different results versus the Hill estimator. We find that for the Euro, Japanese Yen, Swiss franc, Canadian, Australian and New Zealand dollars, the Hill estimator provides a better measure to analyse the extreme behaviour; while for the British pound, the Iglesias and Linton alternative estimator is superior by using Hausman-type tests of misspecification. Measures of value at risk are also provided for the seven markets. We also find that the largest estimated value at risk by far is for the Japanese Yen, followed by the Swiss franc, the Canadian dollar, the Euro, the New Zealand dollar and the Australian dollar. The UK pound has the smallest value at risk when extreme movements occur.

How Much Asymmetry Is There in Bond Returns and Exchange Rates?

We measure asymmetries in the distribution of bond returns and exchange rates and test their statistical significance. Asymmetries are sizable when measured by the coefficient of skewness, a measure that is highly affected by outliers. In contrast, robustly measured asymmetries to outliers often disagree in sign or size, implying that much of the asymmetries measured by the coefficient of skewness can be attributed to extreme observations. Asymmetries in many government bonds returns are only statistically significant according to tests based on the coefficient of skewness. On the contrary, only tests based on robust measures indicate statistically significant asymmetries in the exchanges rates of Japanese Yen, a major funding currency for carry trades, as well as in New Zealand Dollar and Australian Dollar, major investing currencies for carry trades. This observation suggests that sources of asymmetry in carry trades and in government bond returns can be fundamentally different.

Comment on “China as Number One: How about the Renminbi?”

Comment on “China as Number One: How about the Renminbi?”

Transfiguration of the foreign exchange market since the Euro introduction

We confirm that there are changes in the features of the foreign exchange market since the Euro introduction through empirical experiments on five major exchange rate series in the world. We verify the existence of asymmetry in volatility process of Japanese Yen (JPY)/United States Dollar (USD), Australian Dollar (AUD)/USD and New Zealand Dollar (NZD)/USD while JPY appreciates and AUD and NZD depreciate. We also ascertain that volatility for those five major exchange rate series has become larger and the correlation between exchange rate series has become stronger since the Euro introduction.

Liquidity, Risk Appetite and Exchange Rate Movements during the Financial Crisis of 2007-2009

Given the deleveraging process in the banking sector, banks were reluctant to lend funds in the inter-bank market because of uncertainty about their own future need for funds during the financial crisis of 2007-2009. Aggregate liquidity then declined. This paper investigates the impact of the market-wide liquidity risk and carry-trade incentives on exchange rate movements. The results suggest that liquidity risk measured by the spread between Libor and the overnight index swap rate was a significant factor affecting the exchange rate movements of the euro, the British pound and the Swiss franc, while carry trades were important for the yen, the Australia dollar and the New Zealand dollar.

A Study on the Transmission of Money Market Tensions in EMEAP Economies during the Credit Crisis of 2007-2008

The recent tension in the interbank markets following the global financial crisis has raised concerns about the turbulence in interbank markets. This paper utilises two widely used indicators for measuring interbank stress (the interbank rate less the Overnight Index Swap rate and the interbank rate less the yield of government securities) to examine the transmission of interbank tension from the US dollar to nine interbank markets in the EMEAP economies. Using a vector autoregression model, we show that during the credit crisis of 2007-2008, the distress in the US dollar money market had a material impact with durations of seven to 13 days on the interbank markets for the Hong Kong dollar, Japanese yen, Australian dollar and New Zealand dollar. Moreover, based on a bivariate regime switching ARCH model, we also find evidence of volatility co-movement between the interbank stress indicator of the US dollar and that of the Hong Kong dollar, Japanese yen, Australian dollar, New Zealand dollar, Korean won and Singapore dollar during the crisis. The expected duration when two money markets are both in a high-volatility state is estimated to be as long as seven days. The short-lived impact on the EMEAP economies from a shock in the US dollar money market can be attributed to the policy actions taken by central banks and monetary authorities in the region and the coordinated efforts by policy makers worldwide to contain the credit crisis.

Exchange rate assessments for Australia and New Zealand

PurposeThe purpose of this paper is to assess the level of the real effective exchange rate in Australia and New Zealand.Design/methodology/approachThe paper describes three empirical models commonly used to conduct exchange rate assessments and applies them to data for Australia and New Zealand.FindingsThe baseline results using data and medium‐term projections, available as of October 2008, suggest that the Australian and New Zealand dollar were broadly in line with fundamentals, but with a wide variation across models. A battery of sensitivity tests illustrates that altering the underlying assumptions can yield substantially different assessments. The results are particularly sensitive to the choice of assessment horizon, the set of economies included in the sample, medium‐term forecasts, and the exchange rate reference period.Originality/valueThe paper provides an assessment of the exchange rates in Australia and New Zealand.

Do Exchange Rates Affect the Stock Performance of Australian Banks?

We study the impact of currency shifts on the market value of the four major Australian banks. Specifically we examine the relationship between the value of the Australian dollar against the US dollar, the Sterling Pound, and the New Zealand dollar and the PB ratios of these four banks. We find that the negative impact of a drop in the value of the banks' offshore assets in terms of US dollars and Sterling Pounds is being reflected in the stock price, but this is not the case for the New Zealand dollar. There is also a negative relationship between the level of interest rates and the PB ratios indicating that the present value of future income streams is an important issue for investors investing in bank stocks.

Long-term analysis of price, productivity, and profitability trends in New Zealand agriculture

Much has been written and spoken over the years about continually declining inflation adjusted commodity prices, the volatility of the New Zealand dollar, and the difficulties of competing against subsidized agricultural sectors. While NZ agriculture has enjoyed good levels of profitability in recent years these underlying forces still remain and will continue to impact farm profitability. Rising land prices and improved productivity of our competitors are likely to erode NZ agriculture's tr aditional position as a low cost producer in the future. The commonly cited responses to the forces outlined above are 1) adding value to commodities, and 2) increasing productivity. An earlier analysis showed that the NZ sheep and beef sector, in particular, was experiencing decreasing prices in real terms and farm productivity had remained largely unchanged for fifty years. In contrast to the data reviewed earlier, this paper shows that over the last fifteen years the NZ agricultural industry has been exhibiting just those responses required to combat the forces above. New Zealand lamb prices have increased in real terms since the late-1980s and in comparison with international prices. Beef and dairy prices have also fallen substantially less than the comparative international price, however wool and wheat prices have fallen more than the international price. In addition, there have been significant increases in farm pr oductivity, most notably lambing percentage, lamb carcass weights, and milksolids production/ cow. The result has been a 57% increase in dairy Earnings Before Inter est and Tax (EBIT) over the past 5 years, compared with the previous half decade (measured in real terms). Sheep farming has experienced a 79% increase in EBIT over the same period. The challenge and subject of significant debate which is outside the scope of this paper is how NZ agriculture is to remain at the forefront of global pastoral agriculture as a low cost, innovative, and profitable sector. Keywords: agricultural productivity, farm profitability, product prices, New Zealand agriculture.

New Zealand's trade balance: evidence of the J-curve and granger causality

This article tests for the existence of any cointegration relationship between trade balance and real effective exchange rate (REER), foreign income and domestic income for New Zealand during the period 1970–2000. It also examines the direction of the casual relationship between the above variables, and applies the impulse response analysis to determine whether shocks to the REER induce the trade balance to follow a J-curve pattern. The results indicate that there is no cointegration relationship between the above variables; there is a casual connection in both directions between trade balance and foreign income; and New Zealand's trade balance exhibits a J-curve pattern when there is a depreciation of the New Zealand dollar.

PPP-Based Analysis of New Zealand'S Equilibrium Exchange Rate

We use two alternative methodologies to estimate an equilibrium value for the USD/NZD bilateral exchange rate. A cross-country comparison of prices for individual goods, augmented with a Balassa-Samuelson variable suggests that the New Zealand dollar was close to fairly valued in 1999, but undervalued by slightly more than 10 per cent in 2000. Equilibrium was estimated at roughly US$0.52. The second methodology uses dynamic OLS and panel dynamic OLS, to test for a cointegrating relationship between the nominal exchange rate and relative prices, as well as a number of other possible explanatory variables. Using a long sample period for New Zealand, we find some tentative evidence of a stable PPP relationship for the USD/NZD bilateral exchange rate, and this model suggests that the equilibrium value of the dollar is roughly US$0.60. However, the results are very sensitive to the sample period, and in most specifications, particularly those that incorporate the recent depreciation in the New Zealand dollar, the data are unsupportive of a long-run PPP relationship. Therefore, the results should be interpreted with caution.

Modelling the Long–run Real Effective Exchange Rate of the New Zealand Dollar

In this paper we use the behavioural and permanent equilibrium exchange rate approaches to produce long–run equilibrium exchange rates for the effective real exchange rates of the New Zealand dollar. We demonstrate that a well founded measure of the equilibrium value of the dollar may be recovered from a relatively small set of fundamental variables and that this can be used to produce an assessment of the dollar in terms of periods of misalignment.

Monetary policy and the exchange rate*

This paper analyses the implications of uncovered interest parity for departures of the exchange rate from purchasing power parity as a result of temporary policy‐induced changes in the domestic interest rate. The analysis produces a precise formula for the relationship, which suggests that exchange rate movements caused by monetary policy are small relative to the size of swings in the value of the New Zealand dollar during the 1990s. Thus it is both wrong to hold the Reserve Bank responsible for these swings in the past and unrealistic to expect monetary policy to eliminate such swings in the future.

Extracting Market Expectations from Option Prices: An Application to Over-the-counter New Zealand Dollar Options

What are the odds of a large shift in the exchange rate? Is a large depreciation more likely than a large appreciation? This paper uses over-the-counter New Zealand dollar/US dollar option prices to quantify market expectations of exchange rate uncertainty through measures based on risk-neutral probability distribution functions. Results suggest that the estimated probability distributions can provide important insights into market perceptions about exchange rate risk in the future. Econometric evidence indicates that the higher moments calculated from risk-neutral probability density functions can be used to explain the dynamic behaviour of the forward bias measured in the New Zealand dollar/US dollar exchange rate.

Interest Rate Smoothing in New Zealand and Other Dollar Bloc Countries

This paper utilises the partial adjustment approach of Judd and Rudebusch (1998) to empirically estimate the degree of short-term interest rate smoothing by central banks in the dollar block countries. All countries appear to smooth short-term interest rates significantly, with New Zealand and Canada smoothing rates by less than what appears to be the case for Australia and the United States. We then examine the macroeconomic implications of interest rate smoothing using the Reserve Bank of New Zealand's macro model. The model is constructed such that the more interest rates are smoothed in the short-term, the larger inflation and output variability will be over the cycle. However, at least over the narrow range of the empirically based smoothing approaches, the results suggest that there may be little cost in smoothing short-term interest rates in New Zealand to the degree seen in Australia or the United States.

A Macroeconomic Balance Measure of New Zealand's Equilibrium Exchange Rate

We estimate the fair value of the New Zealand dollar using the macroeconomic balance approach. The model's elasticities are calibrated so that they are more appropriate to a small commodity-exporting economy. Over the 1990s, the model estimates that the fair value for the TWI fluctuated between 52 and 59. For the final quarter of 1999, the model estimates that a TWI of around 56 would have been consistent with macroeconomic balance, implying that the TWI (which was around 54.5) was then approximately at fair value. However, this result is subject to a significant amount of uncertainty.