A freely floating exchange rate is still the most viable regime for New Zealand's tradable sector in terms of the impacts of exchange rate variability, although research needs to be carried out to see whether adjustments to the country's fiscal, housing and prudential policy could assist in reducing that variability, a Treasury working paper states.
Here is the abstract for the paper.
This paper explores the impact of New Zealand’s exchange rate variability on the tradable sector, and policy options for dampening exchange rate variability. It finds that exchange rate variability in the medium term is likely to have a negative impact on the tradable sector. However, the link between exchange rate variability and the performance of the tradable sector is not automatic; many factors are at work.
New Zealand’s tradable and non-tradable sector trends are mirrored in some other countries with varying degrees of exchange rate variability. This suggests that exchange rate variability may explain part of the story as to why New Zealand’s tradable sector has underperformed, but it cannot tell the whole story. This paper recognises the significant negative impact that a sustained high level of the exchange rate can have on the tradable sector.
There are no easy or obvious ways to reduce exchange rate variability without some costs. This paper first explores alternative exchange rate regimes, and finds that the freely-floating exchange rate regime is still the most appropriate for New Zealand.
Second, this paper explores ways to reduce exchange rate variability within the existing framework. While there are no silver bullets available to reduce exchange rate variability within the existing framework, fiscal policy and housing policy are worth pursuing in this respect, with the possibility for macro-prudential policy to play a small role in stabilising the cycle.
7 Comments
The level of hedge by our Big Brother EXP's such as Fonterra are part of the the problem for the NZMEA not part of the solution......and at some point they will hopefully not beat the dealer.
The RBNZ have behaved in a manner over the recent years to sure up a hand full of large exporters at the expense of the hundreds of smaller ones....this preference had to have been ...at some point.... a considered, discussed and ratified decision between Govt and the RBNZ .....
ta and hello Steven always good to see the voice of reason...hope you are well.
Your statement was a nice encapsulation that amounted to "for the greater good" and there are always casualties in the interests of "the greater good" ...not to forget interpreted by whom.
Even fonder Regards.
Christov could you expand on that? I would have thought a lower NZD favoured by smaller exporters would still be acceptable to Fonterra (any losses they might have through hedging would be more than compensated for by improved returns in NZD). Very concerning however to see both RBNZ and govt thinking based entirely around minimal value-added commodities; lack of incentive to diversify our export sector could cost us dearly when the proverbial hits the fan.
Neco..something in the region of .57 would get the wider audience going and no it would not necessesarily suit Fonterra if thier hedge was betting against it...it would make them have a vested interest.
that said .57 would bury us in gasoline debt so it's a lose lose.
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