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UC postgrad in US to research NZ exchange rate fluctuations

Canterbury postgraduate heading to New York to research NZ exchange rate fluctuations

July 4, 2014

A University of Canterbury postgraduate is heading to New York to research the rise and fall in the New Zealand exchange rate.

Fluctuating exchange rates impact on the public, positively and negatively. Rising exchange rates make imported consumer goods and imported capital goods for firms cheaper but they also make exports more expensive for foreign buyers which reduce exporters' revenues.

James Graham will do his PhD research at New York University, with the support of a Fulbright scholarship, to find out why New Zealand's exchange is thought to be more volatile than many other countries such as the United States, Europe and Japan.

“Our exchange rate doesn't tend to rise or fall any more than similar countries like Australia. One of the reasons New Zealand's exchange rate fluctuates is that there are frequent changes in New Zealand's economic fortunes. For example, when the price of our exports goes up or down, expectations of our economic growth may rise or fall.

“Also, when other countries' economic fortunes are doing very well or very poorly it impacts on our exchange rate. What's often more important, though, is figuring out why a particular exchange rate movement occurred in the first place. If the exchange rate is falling because New Zealand has entered a recession, this is likely a bad thing overall even though exporters' revenues are likely to rise.

“I'm hoping the two years’ of coursework I have to do before I get to my research will give me a lot of good ideas and tools for investigating the exchange rate. There seem to be two popular ways of researching the exchange rate at the moment. First, statistical models consider the many relationships between exchange rate movements and movements in other economic variables. However, these models often have difficulty exploring causation between these variables.

“Secondly, a bunch of structural models try to uncover causation between different variables. However, these models often have difficulty explaining exchange rate movements. I'm hoping I'll find a way to incorporate the explanatory power of the statistical models, with the ability to identify causation in the structural models.

“In between my studies, I would really like to spend some time working for the Federal Reserve Bank in New York. Hopefully my time at the Reserve Bank of New Zealand, where I am currently working, will be relevant for them, but I expect it will be a much different experience working there in the midst of one of the world's busiest cities.”

Graham’s PhD in economics at New York is a five year degree. In that time, he hopes to wrap his head around his research topic as the exchange rate is an issuer that economists just don't yet seem to agree about.

“We don't yet know whether high exchange rates are on balance detrimental or beneficial for New Zealand and we don't really know if there are policies that can do something about it without causing offsetting harms of their own.

“I'm hoping that my time in New York will give me some perspective from the centre of the economic world, rather from the periphery that I'm used to in New Zealand. I will be learning from some of the world's leading experts in macroeconomics and international economics which will help me to better understand New Zealand's exchange rate issues,” Graham says.


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