6 Conclusion
Theory suggests that medium-term exchange rate variability is likely to be causing problems for exporters but the empirical evidence fails to find a link. Exchange rate variability is likely to be more costly for New Zealand than other countries, due to its small domestic market. At the same time, the link between exchange rate variability and tradable sector performance is not automatic. From the evidence it appears that other factors are also at work and New Zealand's exchange rate variability alone cannot tell the full story. However, it is generally accepted that sustained periods of overvaluation in the exchange rate can be significantly damaging to the tradable sector.
Despite the costs of exchange rate variability, this paper concludes that the freely floating exchange rate regime remains the most viable regime for New Zealand. It provides an important “safety valve” in times of extreme events. Nonetheless, this paper also looks at policy options to help reduce the large amplification of the cycle. While there is no silver bullet available to reduce the amplitude of the exchange rate cycle, this paper concludes that it is worth pursuing further study into whether there is scope for adjustments to be made in New Zealand's fiscal, housing and potentially prudential policy-making tool kit that might assist to reduce exchange rate variability. Fiscal policy in particular has the potential to also reduce the imbalance between the tradable and non-tradable sector.
