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What can the Taylor rule tell us about a currency union between New Zealand and Australia?

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Author Info
Nils Björksten
Arthur Grimes
Özer Karagedikli
Christopher Plantier (Reserve Bank of New Zealand)

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Abstract

The merits of a trans-Tasman currency union have been debated in both New Zealand and Australia. It has been suggested that the New Zealand economy may not behave too differently from at least some of the Australian states, ie they have similar characteristics and they face similar shocks. We test this, under the presumption that the differences in Taylor rule implied interest rate paths for different regions over a business cycle can give us some indication about the nature of the differences in "aggregate" shocks that hit different economies. We compare the implied Taylor rule interest rates for the Australian states to the implied Taylor rule rates for New Zealand. We also compare them to the realised 90 day rates. We find that the Taylor rule implied interest rate paths in Australian regions and in New Zealand are not very different.

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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 DP 2004/05.

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Length: 14 p
Date of creation: Jun 2004
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Handle: RePEc:nzb:nzbdps:2004/05

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Find related papers by JEL classification:
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

References listed on IDEAS
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  1. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
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  2. Murray, John, 1999. "Why Canada Needs a Flexible Exchange Rate," Working Papers 99-12, Bank of Canada. [Downloadable!]
  3. repec:fth:bfdipa:18/2001 is not listed on IDEAS
  4. 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, vol. 21(6), pages 949-964, December. [Downloadable!] (restricted)
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  5. Huang, Angela & Margaritis, Dimitri & Mayes, David, 2001. "Monetary policy rules in practice: Evidence from New Zealand," Research Discussion Papers 18/2001, Bank of Finland. [Downloadable!]
  6. Ken West, 2003. "Monetary policy and the volatility of real exchange rates in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/09, Reserve Bank of New Zealand. [Downloadable!]
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  7. David Hargreaves, 2003. "Monetary policy and the volatility of real exchange rates in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 66, pages 2, September. [Downloadable!]
  8. Alberto Alesina & Robert J. Barro, 2000. "Currency Unions," NBER Working Papers 7927, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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