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

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
Date of revision:
Handle: RePEc:nzb:nzbdps:2004/05
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  1. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
  2. Alberto Alesina & Robert J. Barro, 2000. "Currency Unions," NBER Working Papers 7927, National Bureau of Economic Research, Inc.
  3. Kenneth D. West, 2004. "Monetary Policy and the Volatility of Real Exchange Rates in New Zealand," NBER Working Papers 10280, National Bureau of Economic Research, Inc.
  4. 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.
  5. Angela Huang & Dimitri Margaritis & David Mayes, 2001. "Monetary Policy Rules in Practice: Evidence from New Zealand," Multinational Finance Journal, Multinational Finance Journal, vol. 5(3), pages 175-200, September.
  6. Paul Conway, 1998. "Macroeconomic variability in New Zealand: An SVAR study," New Zealand Economic Papers, Taylor & Francis Journals, vol. 32(2), pages 161-186.
  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.
  8. Murray, John, 1999. "Why Canada Needs a Flexible Exchange Rate," Staff Working Papers 99-12, Bank of Canada.
  9. Aaron Drew & Viv Hall & John McDermott & Robert St. Clair, 2001. "Would adopting the Australian dollar provide superior monetary policy in New Zealand?," Reserve Bank of New Zealand Discussion Paper Series DP2001/03, Reserve Bank of New Zealand.
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