Transcript Calculating a relevant TWI

Calculating a Relevant TWI
Richard Sullivan
Reserve Bank of New Zealand
Trade weighted exchange rate
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•
•
•
What is a TWI/NEER/REER?
Why have one? What is it used for?
What currencies to use?
How to weight? Why not just trade weights?
How to calculate NEER
How to recalculate, and how often?
How to calculate REER
What is a TWI?
TWI = Trade Weighted Index
A multilateral exchange rate which is a weighted
average of exchange rates of foreign currencies,
with the weight for currency based on its share
in trade.
It measures the average price of goods relative
to the average price of goods of trading
partners.
What is it for?
A tool for measuring:
• direct influence of exchange rate movements on prices
• indirect influence of the exchange rate on inflation
through influence on external sector competitiveness
If the index increases, the purchasing power of that
currency is higher (the currency strengthened against the
country's trading partners).
A lower index means that the currency depreciated
(devaluation) so that you need more of that currency to
pay for imports.
Provides a measure of relative value against a range of
currencies you are interested in.
NEER
•Nominal Effective Exchange Rate
– a nominal TWI
•The weighted average value of a country's
currency relative to a pool of currencies.
•The weights are determined by the importance
a home country places on the other currencies
within the pool – usually based on trade.
• Usually measured by trade flows (hence TWI).
TWI less volatile
NZD/USD (cents)
80
Index
80
NZD/USD
70
70
NZD TWI
60
60
50
2005
2006
2007
2008
2009
50
Pa’anga not as volatile as bilateral rates
suggest
0.56
0.70
AUD
USD
0.54
0.67
0.52
0.64
0.50
0.61
0.48
0.58
0.55
Jul-05 Jan-06
0.46
Jul-06 Jan-07
Jul-07
Jan-08 Jul-08
Jan-09 Jul-09
0.44
Jul-05 Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08 Jan-09
Jul-09
105
0.90
NZD
0.85
NEER
100
0.80
0.75
95
0.70
0.65
Jul-05 Jan-06
90
Jul-06
Jan-07 Jul-07
Jan-08
Jul-08
Jan-09 Jul-09
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
REER
• Real Effective Exchange Rate
– a real TWI
• Same as NEER, but adjusted for inflation
• Better measure of competitiveness over time
– takes into account price movements
A higher REER indicates lower competitiveness
as it costs more to produce similar goods.
NEER calculation
Important decisions
• Pick the relevant currencies
– Trade flow?
– Policy goals will provide guide
• Determine appropriate weights
– Which way to weight?
– How often to re-weight?
Choosing Appropriate Currencies
• Trade flows
– Just exports?
• if export competitiveness is the primary goal
– Just imports?
• If imported price inflation is key priority
– All trade?
• Other currency flows
– Remittances
– Capital/grants
• Completeness vs ease of calculation
Factors to consider when
determining weights
• Equal weighting to exports and imports?
• Other currency flows
• Foreign currency regimes
– Currency pegs (e.g to USD)
– Similar ‘baskets’ (e.g Fiji and Tonga)
Third country competition
• Competition faced by exporters from
countries not in ‘basket’
– e.g squash from Mexico to Japan
• Studies show is good proxy for wider range of
currencies within TWI
More currencies does not mean better
coverage
TWI14 index
includes the five
TWI currencies
with the addition of
the currencies of:
•China,
•Malaysia,
•Indonesia,
•Thailand,
•Taiwan,
•Korea,
•Singapore,
•Hong Kong and
• Canada.
Administrivia
• Arithmetic vs geometric mean
• Update frequency
• Ease of finding data
– What data to use
Data website
• IMF data
– Currencies
– GDP
– Inflation
• http://www.imf.org/external/data.htm
• WEO database for GDP and inflation
• IFS if you need currencies
NEER Examples
Examples
• NZD TWI
– 5 currency basket with 50% GDP weight
• Tonga NEER
– 4 currency basket, all trade weight
– 5 currency basket, 25% trade weight
– What about the CNY?
NZD TWI
• GDP weight greatly increases importance of USD
and euro
• Better reflects actual currency traded, and third
country competition
TOP NEER
• Previous methodology
– Trade only weights
• Subject to large changes in weights
• No account for 3rd country competition
– Updated every 5 years
• Weights can become inappropriate
TOP NEER
• Added 3rd country competition
– 25% GDP weights/75% trade weights
(50% made USA too dominant as other countries were so
small relatively)
• Update more regularly
• Stability in weight
Australia NEER weights
China NEER weights
0.07
0.35
Trade
0.30
Trade & GDP
0.06
Trade
05
04
20
03
20
02
20
00
99
98
01
20
20
20
19
96
97
19
19
95
Fiji NEER weights
19
93
92
94
19
19
19
19
90
19
19
05
04
20
03
20
02
20
01
20
00
20
20
19
19
19
19
19
19
19
19
19
19
99
0.00
98
0.01
0.00
97
0.05
96
0.02
95
0.10
94
0.03
93
0.15
92
0.04
91
0.20
90
0.05
91
Trade & GDP
0.25
Japan NEER weights
0.25
0.25
Trade
Trade
0.20
New Zealand NEER weights
04
03
02
01
00
05
20
20
20
20
20
20
98
97
99
19
19
19
95
96
19
19
94
19
92
93
19
19
19
90
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
19
19
19
19
19
19
19
19
97
0.00
96
0.00
95
0.05
94
0.05
93
0.10
92
0.10
91
0.15
90
0.15
Trade & GDP
91
Trade & GDP
19
0.20
United States NEER weights
0.50
0.30
Trade
0.45
Trade
0.40
Trade & GDP
0.25
Trade & GDP
0.35
0.20
0.30
0.25
0.15
0.20
0.10
0.15
0.10
0.05
0.05
05
20
03
02
01
00
04
20
20
20
20
20
98
97
99
19
19
19
95
96
19
19
94
19
92
93
19
19
90
91
19
19
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
19
19
91
0.00
90
0.00
Calculation of NEER
1.
Get trade weights for appropriate year
– appropriate year will always be 2 years behind (e.g in January 2009, the data
you need are for 2007)
– insert total annual import and export data into sheet "data"
– Calculate trade weight as % of ‘basket’ currencies
2.
Get GDP weights for appropriate year
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3.
4.
enter GDP data into sheet "data"
enter average exchange rate for year to make
Convert GDP into USD
Calculate GDP weight as % of ‘basket’ currencies
NEER weights will be weighted average of both trade and GDP weight
Calculate index
– Convert bilateral exchange rates to index with common base
– Use new weights to calculate index = 100 for month in which you plan to
change
– Multiply by factor so that it is splice with previous year (eg if NEER is 51.6,
multiply new index by 51.6/100)
1. Calculating trade weight
• Find import and export data for chosen
currencies
– In local currency
• Calculate as percentage of all trade with those
chosen countries
2. Calculating GDP weight
• Find GDP data for chosen currencies
– In levels
– In common currency
• Calculate as percentage of total GDP of those
chosen countries
3. Calculate NEER weight
Australia
China
Exports
1121972 Exports
93930
Im ports
32923572 Im ports
17501268
Total Trade
34045544 Total Trade
17,595,198
GDP (AUDbn)
1021.062 GDP (CNYbn)
9927.757
AUD
0.836769483 CNY
7.587833333
GDP (USDbn) 854.3935218 GDP (USDbn) 1308.378369
Fiji
Exports
95044
Im ports
37371747
Total Trade 37,466,791
GDP (FJDbn)
2.983
FJD
0.6210
GDP (USDbn)
1.85
Japan
Exports
Im ports
Total Trade
GDP (JPYbn)
JPY
GDP (USDbn)
2063067
7320487
9,383,554
561207.9
117.8
4766.0
New Zealand
Exports
5445809
Im ports
94765689
Total Trade 100,211,498
GDP (NZDbn)
134.743
NZD
0.7349
GDP (USDbn)
99.0
Total Exports
13,655,677
Total Im ports 218,427,817
Total Trade
232,083,494
Total GDP (USDbn) 18,554
Average
exchange rate
for year
Sum of
selected
countries
United States
Exports
4835855
Im ports
28545054
Total Trade 33,380,909
GDP (USDbn)
11523.9
USD
1.0000
GDP (USDbn)
11523.9
3. Calculate NEER weight
Australia
0.147
Australia
0.046
Australia
0.122
China
0.076
Trade
Fiji
Japan
0.161
0.040
New ZealandUnited States
0.432
0.144
China
0.071
GDP
Fiji
Japan
0.000
0.257
New ZealandUnited States
0.005
0.621
China
0.074
NEER
Fiji
Japan
0.121
0.095
New ZealandUnited States
0.325
0.263
Share of
trade/sum of
trade
Share of
GDP/sum of
GDP
Weighted
average of
above
4. Calculate index
• Set bilateral exchange rates to common base
index
• Multiply by NEER weights and aggregate
• Splice with current series
Example
FM EXRATES (Period Averages)
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Indices of exchanges rates
AUSTRALIA
CHINA
FIJI
JAPAN
NEW
ZEALAND
0.6349
0.6326
0.6326
0.6286
0.6124
0.6118
0.6065
0.5980
0.6047
0.5950
0.5749
0.5795
0.6010
0.6040
0.5946
0.5904
0.5858
0.5730
0.5680
0.5612
0.5884
0.6143
0.6884
0.7007
0.6912
0.6822
0.6920
0.6825
0.6565
0.6310
0.6170
0.6173
0.6077
3.9017
3.8603
3.8358
3.8527
3.9125
3.8766
3.8968
3.9281
3.7969
3.7721
3.8699
3.8533
3.8655
3.8553
3.8829
3.8687
3.8073
3.7917
3.7244
3.6951
3.5577
3.4484
3.2446
3.1520
3.1739
3.1580
3.0731
3.0958
3.1949
3.2800
3.3784
3.3944
3.4667
0.8001
0.7938
0.7937
0.7938
0.7880
0.7871
0.7836
0.7808
0.7795
0.7727
0.7737
0.7730
0.7847
0.7913
0.7852
0.7819
0.7842
0.7816
0.7798
0.7782
0.7730
0.7832
0.7983
0.8049
0.7985
0.7965
0.7950
0.7986
0.9073
0.9894
0.9845
1.0225
1.0210
58.4169
59.6491
59.6708
58.4090
60.1851
60.9528
62.6045
63.0804
58.5334
57.7015
59.7669
57.6125
58.9395
57.4268
58.0771
55.2278
55.6749
56.6977
57.7439
57.6917
56.7787
53.8597
47.7000
44.8012
42.3216
41.7139
41.5564
44.2882
46.2006
46.4911
47.7908
47.0004
48.2091
0.7207
0.7123
0.7139
0.7129
0.6901
0.6885
0.6755
0.6593
0.6904
0.7005
0.6792
0.6810
0.6814
0.6890
0.6805
0.6815
0.6889
0.6993
0.7092
0.7151
0.7317
0.7460
0.7781
0.8169
0.8299
0.8354
0.8718
0.8559
0.8193
0.8039
0.7751
0.7710
0.7506
Create
common base
UNITED
STATES
AUSTRAL
IA
0.4988
0.4956
0.4948
0.4979
0.5065
0.5049
0.5106
0.5185
0.5013
0.5014
0.5158
0.5192
0.5243
0.5320
0.5417
0.5464
0.5439
0.5437
0.5398
0.5404
0.5192
0.5045
0.4747
0.4617
0.4631
0.4620
0.4496
0.4529
0.4677
0.4807
0.4944
0.4969
0.5074
100.00
99.64
99.64
99.00
96.45
96.36
95.52
94.19
95.24
93.71
90.55
91.27
94.67
95.13
93.66
92.99
92.27
90.24
89.46
88.39
92.67
96.75
108.42
110.36
108.86
107.45
108.99
107.49
100.00
96.11
93.97
94.02
92.56
CHINA
FIJI
100.00
98.94
98.31
98.74
100.28
99.36
99.88
100.68
97.31
96.68
99.19
98.76
99.07
98.81
99.52
99.15
97.58
97.18
95.46
94.71
91.18
88.38
83.16
80.79
81.35
80.94
78.76
79.35
100.00
102.66
105.74
106.24
108.51
100.00
99.20
99.20
99.21
98.48
98.37
97.94
97.58
97.43
96.57
96.70
96.61
98.07
98.90
98.14
97.73
98.01
97.68
97.46
97.26
96.61
97.89
99.77
100.59
99.80
99.54
99.36
99.82
100.00
109.06
108.51
112.70
112.53
Multiply by
weights to get
NEER
NEER
JAPAN
100.00
102.11
102.15
99.99
103.03
104.34
107.17
107.98
100.20
98.78
102.31
98.62
100.89
98.31
99.42
94.54
95.31
97.06
98.85
98.76
97.20
92.20
81.65
76.69
72.45
71.41
71.14
75.81
100.00
100.63
103.44
101.73
104.35
NEW
ZEALAND
100.00
98.84
99.05
98.91
95.75
95.53
93.73
91.48
95.80
97.19
94.25
94.49
94.54
95.60
94.42
94.56
95.59
97.02
98.40
99.22
101.52
103.51
107.97
113.35
115.15
115.92
120.96
118.76
100.00
98.12
94.60
94.12
91.62
UNITED
STATES
100.00
99.36
99.20
99.83
101.54
101.24
102.38
103.95
100.52
100.53
103.42
104.10
105.11
106.66
108.61
109.56
109.05
109.01
108.22
108.36
104.10
101.15
95.18
92.56
92.86
92.64
90.14
90.80
100.00
102.79
105.70
106.23
108.49
2005 weights
2006 weights
2007 weights
100.00
99.54
99.55
99.32
98.80
98.76
98.69
98.31
97.76
97.65
97.64
97.47
98.68
99.23
99.47
99.49
99.02
99.16
99.41
99.56
99.60
99.11
98.91
98.79
99.26
99.02
98.82
99.51
99.59
100.00
100.00
101.01
100.80
101.17
101.17
Splice index
NEER
100.00
99.54
99.55
99.32
98.80
98.76
98.69
98.31
97.76
97.65
97.64
97.47
98.68
99.23
99.24
98.78
98.91
99.17
99.32
99.36
98.87
98.66
98.55
99.02
98.78
98.57
99.26
99.35
100.00
101.01
100.80
101.17
101.17
To include the CNY?
• Currency flows suggest it is a very important
currency to consider
– Imports
– Grants
– Loans
• Pegged to USD
– So no reason to add as new currency
• Peg is being loosened
– Should increase importance of CNY
– Consider inclusion as CNY moves become less tied to
USD
REER
Another important decision
• What deflator to use?
• Depends on policy goal
• Core inflation is theoretically best
– But different countries measure core inflation
differently
• Headline inflation is most accessible
– All countries publish
– Best for international comparison due to similarity
http://www.rbnz.govt.nz/research/bulletin/2007_2011/jun2007.html
“A review of the trade weighted index”
Calculation
• Calculate bilateral real exchange rates
– r = e*P/P´
•
•
•
•
•
•
•
•
r = real exchange rate
e = nominal exchange rate
P = home price level
P´= foreign price level
Index bilateral rates to common base
Multiply by NEER weights and aggregate
Splice with current index
Reweight at same time as NEER
Example NZD/TOP
NZD/TOP
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
0.7207
0.7123
0.7139
0.7129
0.6901
0.6885
0.6755
0.6593
0.6904
0.7005
0.6792
0.6810
0.6814
0.6890
0.6805
0.6815
0.6889
0.6993
0.7092
0.7151
0.7317
0.7460
0.7781
0.8169
0.8299
0.8354
0.8718
0.8559
0.8193
0.8039
0.7751
0.7710
0.7506
CPI
NZ
TONGA
1005
142.6
1006.25
140.9
1008.75
141.1
1010
141.7
1012.5
142
1017.5
142.8
1020
144
1021.25
147.9
1023.75
149
1025
150.4
1028
150.9
1034
151.1
1037
152.3
1038.75
155.8
1042.25
158.3
1044
158.7
1048.25
159
1056.75
160.7
1061
161.6
1065
161.6
1073
165.2
1077
165.9
1075.75
165.2
1073.25
163.1
1072
162
1072.75
161.8
1074.25
161.4
1075
162.5
1076.5
161.2
1079.5
163.8
1081
163.6
1084.5
163.6
1091.5
166.1
Real NZD/TOP
100.0
97.5
97.6
97.8
94.6
94.5
93.2
93.3
98.2
100.5
97.5
97.3
97.8
101.0
101.0
101.3
102.1
103.9
105.6
106.1
110.1
112.3
116.8
121.4
122.6
123.2
128.0
126.5
119.9
119.2
114.7
113.7
111.7
Nominal
exchange rate
CPI
(index not inflation)
Nominal exchange rate*
Tonga CPI/NZ CPI
*1023
(to base at 100 in Dec 06)
Nominal vs Real
130
125
120
115
110
105
100
95
90
Real NZD/TOP
NZD/TOP
Why the difference?
CPI Inflation
14%
12%
NZ
10%
TONGA
8%
6%
4%
2%
0%
Calculation
• Calculate bilateral real exchange rates
– r = e*P/P´
•
•
•
•
•
•
•
•
r = real exchange rate
e = nominal exchange rate
P = home price level
P´= foreign price level
Index bilateral rates to common base
Multiply by NEER weights and aggregate
Splice with current index
Reweight at same time as NEER
Questions