A fresh look at the merits of a currency union

This article provides an update on the ongoing debate as to whether New Zealand should enter into a currency union with Australia. While the decision to adopt a common currency would ultimately be a political one, assessing the specific economic costs and benefits is important for informed debate. Theoretical developments in the currency union literature and the experience of actual currency unions are both relevant considerations. Experience with the European Monetary Union has focussed attention on the `endogeneities' of optimal currency areas, where a common currency can be the catalyst for further economic integration between member states. However, the jury is still out on this front. Since our last review in 2001, there has also been some further local research looking at how a common currency might influence the New Zealand economy, but the implications of this research remain inconclusive. The case for a common currency for New Zealand and Australia, at least in economic terms, continues to be open for debate.