TERMS OF TRADE AND THE EXCHANGE-RATES OF NEW-ZEALAND AND AUSTRALIA

Effects of the terms of trade on the bilateral exchange rate of New Ze aland and Australia and of each of these countries with the USA are ev aluated. There is strong evidence of cointegration of the exchange rat es and a ratio of the respective national price levels when the relati ve terms of trade of the countries are included in dynamic models. Whi le evidence that the long-run equilibrium relationships satisfy purcha sing power parity is mixed, relative improvement of a country's terms of trade results in real appreciation of its currency in all cases. Th e terms of trade are also found to be exogenous for the parameters of the long-run New Zealand Australia exchange-rate equilibrium.