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Would Australia–New Zealand Be A Viable Currency Union? Evidence From Interstate Risk-Sharing Performances

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  • Faisal Rana
  • Faruk Balli

Abstract

type="main" xml:id="coep12130-abs-0001"> In this article, we first measure the potential welfare gains from perfect risk sharing among Australian states and New Zealand regions under possible unification. We show that New Zealand regions reap moderate gains from perfect risk sharing when they form a union with Australia, whereas for Australian states, the gains are somewhat similar to what they have attained at the intranational level. Second, we measure the extent of interstate risk sharing and intertemporal smoothing between the two countries. We are able to observe a substantial degree of intertemporal smoothing among Australian states and New Zealand regions, either alone or jointly, thus confirming the permanent income hypothesis. Further, unique to the risk-sharing literature, we decompose the aggregate (nondiversifiable) output shocks into positive and negative components, in order to assess the strength of risk-sharing mechanisms across business cycles. The study finds a virtual absence of risk sharing when Australia and New Zealand face negative aggregate fluctuations, raising doubts about the feasibility of the union, particularly during economic downturns. (JEL F41, F36)

Suggested Citation

  • Faisal Rana & Faruk Balli, 2016. "Would Australia–New Zealand Be A Viable Currency Union? Evidence From Interstate Risk-Sharing Performances," Contemporary Economic Policy, Western Economic Association International, vol. 34(3), pages 531-552, July.
  • Handle: RePEc:bla:coecpo:v:34:y:2016:i:3:p:531-552
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    File URL: http://hdl.handle.net/10.1111/coep.2016.34.issue-3
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    Cited by:

    1. Eduardo Silva & Alex Ferreira, 2023. "Risk-sharing within Brazil and South America," Empirical Economics, Springer, vol. 65(2), pages 661-695, August.

    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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