RDP 2003-03: Australia's Medium-Run Exchange Rate: A Macroeconomic Balance Approach 4. Conclusion

In this paper, we have presented estimates of a model of exchange rate equilibrium consistent with internal and external balance. Internal balance is defined in terms of output being at potential; external balance is reached when the current account (and therefore also the capital account) is at some target value.

We remain agnostic in the paper about the appropriate sustainable target value for the current account. Our aim, instead, is to estimate the level of the exchange rate consistent with alternative possible values for the target current account. Not surprisingly, the model has the property that lower values of the assumed medium-term current account deficit are associated with a lower medium-term exchange rate. However, the estimates of this relationship are highly sensitive to the choice of estimation period and to the values of key export and import elasticities.