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Would adopting the Australian dollar provide superior monetary policy in New Zealand?

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Abstract

Counterfactual experiments with the Reserve Bank of New Zealand's core model provide some insight into the implications for New Zealand's economic performance over the 1990s, had it credibly fixed its currency to the Australian dollar. If New Zealand had faced the relatively more stimulatory Australian monetary conditions prevailing over the 1990s, then output growth may have been temporarily boosted. However, demand pressures would have probably been greater and inflation higher. In particular, results suggest that over the latter part of the 1990s annual inflation would have been around 1 percentage point higher on average. Stochastic simulation experiments provide a vehicle to analyse what the implications of currency union might be more generally. Results suggest that if New Zealand were to lose its ability to set monetary policy independently, then the variability of inflation and output would increase over the business cycle.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2001/03.

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Length: 28p
Date of creation: Aug 2001
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Handle: RePEc:nzb:nzbdps:2001/03

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  1. Sharon McCaw & C John McDermott, 2000. "How New Zealand adjusts to macroeconomic shocks: implications for joining a currency area," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 63, March.
  2. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 98-03, Federal Reserve Bank of San Francisco.
  3. Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers, Bank of England 56, Bank of England.
  4. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, Elsevier, vol. 38(2), pages 183-198, March.
  5. Andrew Coleman, 2001. "Three Perspectives on an Australasian Monetary Union," RBA Annual Conference Volume, Reserve Bank of Australia, in: David Gruen & John Simon (ed.), Future Directions for Monetary Policies in East Asia Reserve Bank of Australia.
  6. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 386-390, May.
  7. Drew, Aaron & Hunt, Benjamin, 2000. "Efficient simple policy rules and the implications of potential output uncertainty," Journal of Economics and Business, Elsevier, Elsevier, vol. 52(1-2), pages 143-160.
  8. Aaron Drew & L Christopher Plantier, 2000. "Interest rate smoothing in New Zealand and other dollar bloc countries," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP2000/10, Reserve Bank of New Zealand.
  9. Viv Hall & Angela Huang, 2003. "Would Adopting the US Dollar Have Led to Improved Inflation, Output and Trade Balances for New Zealand in the 1990s?," Working Papers, Motu Economic and Public Policy Research 03_14, Motu Economic and Public Policy Research.
  10. A.M.G Coleman & Bob Buckle & A.Grimes, 1989. "Economic notes," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 52, june.
  11. David Hargreaves & C John McDermott, 1999. "Issues relating to optimal currency areas: theory and implications for New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 62, September.
  12. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(3), pages 564-94, June.
  13. Drew, Aaron & Hall, Viv B. & McDermott, C. John & Clair, Robert St., 2004. "Would adopting the Australian dollar provide superior monetary policy in New Zealand?," Economic Modelling, Elsevier, Elsevier, vol. 21(6), pages 949-964, December.
  14. Andrew Coleman, 1999. "Economic Integration and Monetary Union," Treasury Working Paper Series, New Zealand Treasury 99/06, New Zealand Treasury.
  15. Aaron Drew & Ben Hunt, 1998. "The Forecasting and Policy System: stochastic simulations of the core model," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand G98/6, Reserve Bank of New Zealand.
  16. Viv Hall & Kunhong Kim & Robert Buckle, 1998. "Pacific rim business cycle analysis: Synchronisation and volatility," New Zealand Economic Papers, Taylor & Francis Journals, Taylor & Francis Journals, vol. 32(2), pages 129-159.
  17. Dean Scrimgeour, 2001. "Exchange rate volatility and Currency Union: Some theory and New Zealand evidence," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP2001/04, Reserve Bank of New Zealand.
  18. Nils Bjorksten, 2001. "The current state of New Zealand monetary union research," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 64, December.
  19. Buiter, Willem H, 1988. "Death, Birth, Productivity Growth and Debt Neutrality," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 98(391), pages 279-93, June.
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Cited by:
  1. Viv B. Hall, 2005. "An Australasian Currency, New Zealand Adopting The Us Dollar, Or An Independent Monetary Policy?," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2005-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Drew, Aaron & Hall, Viv B. & McDermott, C. John & Clair, Robert St., 2004. "Would adopting the Australian dollar provide superior monetary policy in New Zealand?," Economic Modelling, Elsevier, Elsevier, vol. 21(6), pages 949-964, December.
  3. Hall, Viv B & McDermott, C John, 2011. "An unobserved components common cycle for Australasia? Implications for a common currency," Working Paper Series, Victoria University of Wellington, School of Economics and Finance 1548, Victoria University of Wellington, School of Economics and Finance.
  4. Viv Hall & Angela Huang, 2004. "Would adopting the us dollar have led to improved inflation, output and trade balances, for New Zealand in the 1990s?," New Zealand Economic Papers, Taylor & Francis Journals, Taylor & Francis Journals, vol. 38(1), pages 49-63.
  5. Nils Bjorksten, 2001. "The current state of New Zealand monetary union research," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 64, December.
  6. Dean Scrimgeour, 2001. "Exchange rate volatility and Currency Union: Some theory and New Zealand evidence," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP2001/04, Reserve Bank of New Zealand.
  7. Gerlach-Kristen, Petra, 2006. "Internal and external shocks in Hong Kong: Empirical evidence and policy options," Economic Modelling, Elsevier, Elsevier, vol. 23(1), pages 56-75, January.
  8. Nils Björksten & Arthur Grimes & Özer Karagedikli & Christopher Plantier, 2004. "What can the Taylor rule tell us about a currency union between New Zealand and Australia?," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP 2004/05, Reserve Bank of New Zealand.
  9. Roberto Duncan, 2003. "Floating, Official Dollarization, and Macroeconomic Volatility:An Analysis for the Chilean Economy," Working Papers Central Bank of Chile, Central Bank of Chile 249, Central Bank of Chile.
  10. Eduard Hochreiter & Anton Korinek & Pierre L. Siklos, 2003. "The potential consequences of alternative exchange rate regimes: A study of three candidate regions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(4), pages 327-349.
  11. Sebastian Edwards, 2006. "External Imbalances in an Advanced, Commodity-Exporting Country: The Case of New Zealand," NBER Working Papers 12620, National Bureau of Economic Research, Inc.

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