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Exchange rate volatility and Currency Union: Some theory and New Zealand evidence

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Author Info
Dean Scrimgeour (Reserve Bank of New Zealand)

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Abstract

This paper considers the effect of currency union on exchange rate volatility. At a theoretical level, a simple framework is developed for thinking about volatility and exchange rate arrangements and some inferences are drawn from it. Empirically, the interaction between currency areas and exchange rate volatility is analysed by constructing counterfactual exchange rate series for the scenarios of currency union with Australia or with the United States from 1985 to 2001. We cannot confidently conclude that New Zealand's quarter-to-quarter exchange rate volatility would have been lower in a currency union with the United States or Australia. By contrast, cyclical variability in the New Zealand exchange rate has been greater over the last sixteen years than it would have been in a currency union with either Australia or the United States.

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File URL: http://www.rbnz.govt.nz/research/discusspapers/dp01_4.pdf
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Publisher Info
Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2001/04.

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Length: 33p
Date of creation: Aug 2001
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Handle: RePEc:nzb:nzbdps:2001/04

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F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Kenneth Rogoff, 2001. "Why Not a Global Currency?," American Economic Review, American Economic Association, vol. 91(2), pages 243-247, May. [Downloadable!] (restricted)
  2. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  3. James MacKinnon, 1990. "Critical Values for Cointegration Tests," University of California at San Diego, Economics Working Paper Series 90-4, Department of Economics, UC San Diego. [Downloadable!]
  4. Alberto Alesina & Robert J. Barro, 2001. "Dollarization," American Economic Review, American Economic Association, vol. 91(2), pages 381-385, May. [Downloadable!] (restricted)
  5. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November. [Downloadable!] (restricted)
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  6. 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, vol. 62, September. [Downloadable!]
  7. Christian Hawkesby & Christie Smith & Christine Tether, 2000. "New Zealand's currency risk premium," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 63, September. [Downloadable!]
  8. David Hargreaves & Andy Brookes & Carrick Lucas & Bruce White, 2000. "Can hedging insulate firms from exchange rate risk," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 63, March. [Downloadable!]
  9. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. McKenzie, Michael D, 1999. " The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Blackwell Publishing, vol. 13(1), pages 71-106, February. [Downloadable!] (restricted)
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  1. Eduard Hochreiter & Pierre Siklos, 2004. "From Floating to Monetary Union: The Economic Distance between Exchange Rate Regimes," SUERF Studies, SUERF - The European Money and Finance Forum, number 2004/5 edited by Morten Balling, October. [Downloadable!]
  2. 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., vol. 8(4), pages 327-349. [Downloadable!]
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This page was last updated on 2009-11-28.

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