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Fundamental Determinants of Exchange Rates$
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Jerome L. Stein and Polly Reynolds Allen

Print publication date: 1998

Print ISBN-13: 9780198293064

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0198293062.001.0001

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The Dynamics of the Real Exchange Rate and Current Account in a Small Open Economy: Australia

The Dynamics of the Real Exchange Rate and Current Account in a Small Open Economy: Australia

Chapter:
(p.85) 3 The Dynamics of the Real Exchange Rate and Current Account in a Small Open Economy: Australia
Source:
Fundamental Determinants of Exchange Rates
Author(s):

Guay C. Lim

Jerome L. Stein (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/0198293062.003.0003

The underlying movements in the equilibrium real exchange rate – NATREX – in Australia are explained by the evolution of the fundamentals. They are: the terms of trade, the private saving ratio, fiscal policy, the productivity of capital in the tradable and nontradable sectors, and world real interest rates. Real trade deficits and the growth of the debt are initially produced by a rise in the productivity of capital, which stimulates investment or a decline in social thrift. The foreign debt is only a source of concern if it has resulted from a decline in the social saving ratio. Social policies designed to reduce a trade deficit that adversely affect growth are counterproductive.

Keywords:   Australia fiscal policy, Australia productivity of capital, Australia social saving ratio, Australian current account, Australian foreign debt, Australian real exchange rate, terms of trade, world real interest rates

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