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Economic Integration and Monetary Union

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  • Andrew Coleman

Abstract

Recent research shows that trade of goods and financial products is much greater within countries than it is between countries, even allowing for factors such as transports costs. This lack of economic integration is likely to be costly for small nations, as internal trade is much less diverse than internal trade in large nations. European countries have long argued that the adoption of a single currency is a primary means to enhance economic and social integration, and with the adoption of the euro most European countries have given up monetary independence in order to gain these benefits. This paper examines the modern literature analysing the costs and benefits of forming a monetary union. It contends that New Zealand should reassess the merits of these arguments, although it does not perform a cost benefit analysis for New Zealand, or even recommend whose currency should be preferred. It appears that the benefits of monetary independence are lower than previously thought. This is because most countries have attained low inflation, and because of new evidence that the volatility of exchange rates inherent with monetary independence may be the cause of economic shocks rather than the means of adjusting to economic shocks.

Suggested Citation

  • Andrew Coleman, 1999. "Economic Integration and Monetary Union," Treasury Working Paper Series 99/06, New Zealand Treasury.
  • Handle: RePEc:nzt:nztwps:99/06
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    File URL: http://www.treasury.govt.nz/publications/research-policy/wp/1999/99-06/twp99-6.pdf
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    References listed on IDEAS

    as
    1. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
    2. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    3. repec:hrv:faseco:33077905 is not listed on IDEAS
    4. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
    5. Andrew Coleman & Toby Daglish, "undated". "Regional Price Convergence in Australia and New Zealand, 1984-1996," Treasury Working Paper Series 98/03, New Zealand Treasury.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Viv Hall & Angela Huang, 2004. "Would adopting the us dollar have led to improved inflation, output and trade balances, for New Zealand in the 1990s?," New Zealand Economic Papers, Taylor & Francis Journals, vol. 38(1), pages 49-63.
    2. Dean Scrimgeour, 2001. "Exchange rate volatility and Currency Union: Some theory and New Zealand evidence," Reserve Bank of New Zealand Discussion Paper Series DP2001/04, Reserve Bank of New Zealand.
    3. Wai Kin Choy & David C Mare & Peter Mawson, 2002. "Modelling Regional Labour Market Adjustment in New Zealand," Treasury Working Paper Series 02/01, New Zealand Treasury.
    4. 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.
    5. 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.
    6. Scrimgeour, Dean, 2002. "Exchange rate volatility and currency union: New Zealand evidence," Journal of Policy Modeling, Elsevier, vol. 24(7-8), pages 739-749, November.
    7. Nils Bjorksten & Anne-Marie Brook, 2002. "Exchange rate strategies for small open developed economies such as New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, March.
    8. Nils Bjorksten, 2001. "The current state of New Zealand monetary union research," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, December.

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