Research Discussion Paper – RDP 9601 Why Does the Australian Dollar Move so Closely with the Terms of Trade?

Contents

• Introduction
• The Dynamic Properties of the Terms of Trade
• Modelling the Real Exchange Rate
• Predictable Real Exchange Rate Changes and Excess Returns
• Discussion and Conclusions
• Appendix A: Stationarity Tests
• Appendix B: Real Exchange Rate Model B
• Appendix C: Monte Carlo Simulations
• Appendix D: Data
• References

We thank participants at a Reserve Bank seminar and Adrian Pagan for comments. We are very grateful to John Simon for performing the Monte Carlo simulations in the paper. The views expressed are those of the authors and should not be attributed to the Reserve Bank of Australia.