The exchange rate is just a price

By Paul Walker 17/04/2015


How often must this be said?

Oliver Hartwich writes in the latest New Zealand Initiative Insights (Insights 12: 10 April 2015 ),

The Reserve Bank of Australia’s surprise decision not to cut interest rates only postponed the expected “parity party” between the Kiwi and the Aussie dollars. The way things are going, it is a matter of time until both currencies are of equal value.

The currency development leaves politicians and commentators divided. On Wednesday, The New Zealand Herald was jubilant (“Transtasman parity worth a celebration”) whereas the Waikato Times played the party-pooper (“Dollar parity bad news”).

Unsurprisingly, Prime Minister John Key claimed the strong Kiwi as an indication of a strong economy while his counterpart, Labour leader Andrew Little warned of negative side effects of our strong dollar.

But why are they talking about parity at all? The exchange rate is just a price like any other price in the economy. The exchange rate being talked about in this case is just the price of the Australian dollar, which given it is floating will go up and down when the demand for and supply of the two currencies change. Just like every other good in he economy. If there are changes in the supply and /or demand for bread, the price of bread changes but we don’t see stupid comments by politicians and newspaper editors about it. Why not? If changes in one price are worthy of comments why not changes in all prices?

At best changes in exchange rates may act as an indicator that something is amiss in some sector of the economy. But if this is so then the proper reaction should be to identify the problem and curing it at its source. Not with going on about the exchange rate. Don’t shoot the messenger.

Can these commentators just get over their unjustified obsession with exchanges rates. Also why are they getting excited about the nominal exchange rate without asking questions about what is happening to the real exchange rate?