1 Introduction
This paper builds on a preceding paper, New Zealand's Exchange Rate Cycles: Evidence and Drivers (Mabin, 2010), which examined the extent of New Zealand's exchange rate fluctuations compared with other countries and the key drivers of those fluctuations. This paper examines whether exchange rate fluctuations are hindering New Zealand's tradable sector and economic growth and, in particular, it focuses on:
- The links between exchange rate fluctuations and tradable sector performance (the part of the economy particularly exposed to foreign competition); and
- Different exchange rate regimes and policy options within New Zealand's existing regime that could help dampen New Zealand's high exchange rate variability.
Mabin (2010) found that New Zealand's medium-term exchange rate variability - while high - is similar to some other relevant comparator countries. This second paper focuses on the variability of exchange rate cycles in the medium term. The uncertainty created by a heavily fluctuating exchange rate in the medium term is often cited as a major hindrance to the performance of the tradable sector in New Zealand.[2] Furthermore, sustained deviations away from the equilibrium level of the exchange rate can also be damaging to the tradable sector (in the case of an overvaluation) and possibly to economic growth overall. For example, the sustained high level of the exchange rate is likely to have played a large role in the performance of New Zealand's tradable sector in the past five years. Figure 1 shows the level of the real exchange rate compared to its average since 1970 - a crude measure of under or overvaluation, and tradable sector output. It illustrates the high level of the exchange rate in recent years and the corresponding stagnation and decline in the performance of New Zealand's tradable sector.
The issue of the sustained high level of the exchange rate is part of a wider issue of the imbalances that have built up in the New Zealand economy. This is beyond the scope of this paper.
- Figure 1: New Zealand’s tradable sector output and the real effective exchange rate
This paper is aimed at a non-technical but interested audience. It aims to faciliate informed discussion and greater transparency around a complex issue of interest to all New Zealanders.
Notes
- [2]See for example Export New Zealand (2010).
