The Determinants of the Real Exchange Rate: the Case of New Zealand
The Determinants of the Real Exchange Rate: the Case of New Zealand

Summary/Abstract: One of the topics in international finance which draws attention is the determination of real exchange rates. Real exchanges rate has been one of the most debated topics both in theory and practice since it plays a significant role in the economies. It plays a major role for international trade and tourism (Katircioglu, 2010; Katircioglu, 2009). The importance of real exchange rates especially in developing countries has been examined by many economists such as Edwards (1989), Elbadawi (1989), Kiguel (1992), Kıpıcı and Kesriyeli (1997), Ellis (2001), Chinn (2006) and Catão (2007). The existing empirical literature generally studies both developed and developing countries. It has been shown that best performers are those countries that can align an appropriate real exchange rate sufficiently close to the equilibrium real exchange rate (ERER) (Williamson, 1985; Harberger, 1986; Razin and Collins, 1997; and Richaud et al., 2000). Some economists mention that many cases of the economic failures, particularly in developing countries have been the result of inappropriate exchange rate policies. For example, the January 1994 devaluation of the CFA Francs in West and Central Africa, the Mexican currency crisis at the end of 1994, the Asian crisis in mid-1997, and the Brazilian devaluation in January 1999 are reminders of the macroeconomic disruptions that can be caused by the RER misalignment. Therefore, the issue of how to choose a proper value of the nominal exchange rate has remained a key concern in developing countries.

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