Multiple structural regimes in real exchange rate misalignment: the case of Australian dollar

Abstract

We apply the Bai and Perron method (Econometrica, 1998, 66, 47–78) to search for several structural changes in the real exchange rate misalignment data of the Australian dollar over January 1976 to February 2000. Then, the estimated structural breaks dates are compared with Australian monetary and exchange rate regimes from 1976. This brings us to conclude that a good monetary management is needed to face real exchange rate distortions. Besides, implementing a policy-mix by combining an inflation targeting policy and a dirty flexible exchange rate policy turns out to be really effective to struggle real misalignments as far as Australia is concerned.

Notes

¹ For instance, overvaluation situations may result in current account deficits, exchange rate crisis, low-economic growth in the long run, etc.

² Our presentation is based on Jouini and Boutahar (2003, 2005).

³ M _t is obtained from Hermet et al. (2004).

⁴ A partial structural break model has been considered, but it was not significant.

⁵ This failure results from the instability in the money demand arising with the financial liberalization at the beginning of 1980s (Macfarlane, 1999).

⁶ This checklist policy aimed at stabilizing some key economic variables, namely the exchange rate, the income and the inflation rate successively (Macfarlane, 1999).