Australia-New Zealand Currency Union: A Structural Approach
This paper compares an Australia-New Zealand currency union to a purely fl oating exchange rate regime in the context of a structural, two-country open economy model. Micro-foundations support policy assessment by facilitating direct calculation of household welfare. Analysis focuses on changing business cycle volatilities; the role of risk is not considered. At benchmark calibration currency union is welfare reducing for both Australia and New Zealand. Sensitivity analyses reveal these results to be qualitatively robust over alternative degrees of shock correlation and shock transmission.
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