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The determinants of Australia's exchange rate based on the internal–external balance approach introduced by Williamson (1983) were analysed. Internal balance implies that the economy is operating at supply potential with no inflationary pressures. External balance is characterised as the sustainable net flow of resources (corresponding to a current account to gross domestic product ratio) between countries in internal balance. After estimating a disaggregated trade model for Australia, estimates of the medium-term exchange rate associated with a given current account position were provided. These estimates, however, vary considerably through time because of variations in key parameters. [ABSTRACT FROM AUTHOR]
