Dynamic interactions between the exchange rate, domestic price level and terms of trade of Australia and New Zealand, relative to the United States, are evaluated. Under the restriction that a nominal shock has no long-run effect on the relative terms of trade, real shocks dominate nominal shocks in accounting for fluctuations in real and nominal exchange rates. For Australia, real shocks that improve the relative terms of trade have a negligible effect on the domestic price level relative to that of the United States but, for New Zealand, there is a significant permanent increase in the relative domestic price level.
|Number of pages||14|
|Publication status||Published - Dec 1996|