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Monetary policy transmission mechanisms and currency unions: A vector error correction approach to a Trans-Tasman currency union

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  • Haug, Alfred A.
  • Karagedikli, Ozer
  • Ranchhod, Satish

Abstract

Transmission mechanisms are the channels through which monetary policy affects macroeconomic variables, such as GDP and inflation. Differences in transmission mechanisms can generate asymmetric behaviour among currency union partners when they experience shocks. This has the potential to widen existing cyclical variation between members of a currency union. We examine the similarity of transmission mechanisms in New Zealand and Australia and consider the implications this has for a currency union between the two economies. We examine these using the Vector Error Correction methodology. While conclusions using this methodology for New Zealand and Australia remain quite fragile, our analysis nevertheless suggests that the transmission mechanisms in New Zealand and Australia do display many similarities. In particular the adjustments of both GDP and the CPI in response to monetary policy shocks appear to be very similar. However there are some differences in terms of the size of the responses of some of the variables to identical monetary policy shocks. In a currency union with a different exchange rate pattern and with different monetary policy shocks, New Zealand may experience some new challenges.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 27 (2005)
Issue (Month): 1 (February)
Pages: 55-74

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Handle: RePEc:eee:jpolmo:v:27:y:2005:i:1:p:55-74

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Web page: http://www.elsevier.com/locate/inca/505735

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Cited by:
  1. T. Jayaraman & Chee-Keong Choong, 2009. "How does monetary policy transmission mechanism work in Fiji?," International Review of Economics, Springer, vol. 56(2), pages 145-161, June.
  2. Alfred A. Haug & Christie Smith, 2012. "Local Linear Impulse Responses for a Small Open Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(3), pages 470-492, 06.
  3. Fielding, David & Shields, Kalvinder, 2006. "Regional asymmetries in monetary transmission: The case of South Africa," Journal of Policy Modeling, Elsevier, vol. 28(9), pages 965-979, December.
  4. Leon Berkelmans, 2005. "Credit and Monetary Policy: An Australian SVAR," RBA Research Discussion Papers rdp2005-06, Reserve Bank of Australia.
  5. Wadud, I.K.M. Mokhtarul & Bashar, Omar H.M.N. & Ahmed, Huson Joher Ali, 2012. "Monetary policy and the housing market in Australia," Journal of Policy Modeling, Elsevier, vol. 34(6), pages 849-863.

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