Dwr. Gruen et J. Wilkinson, AUSTRALIA REAL EXCHANGE-RATE - IS IT EXPLAINED BY THE TERMS OF TRADE OR BY REAL INTEREST DIFFERENTIALS, Economic record, 70(209), 1994, pp. 204-219
We find weak evidence of a stable relationship between the Australian
real exchange rate and the terms of trade from 1969 to 1990. Since the
float, the terms of trade and long real interest differentials togeth
er help to explain the real exchange rate. Our best estimates are that
a real exchange rate appreciation of about 0.3 to 0.5 per cent is ass
ociated with a 1 per cent improvement in the terms of trade, while an
appreciation of about 2 to 3 1/2 per cent is associated with an increa
se of 1 percentage point in the differential between Australian and wo
rld long real interest rates.