Would adopting the Australian dollar provide superior monetary policy in New Zealand?

Counterfactual experiments with the Reserve Bank of New Zealand's core model provide some insight into the implications for New Zealand's economic performance over the 1990s, had it credibly fixed its currency to the Australian dollar. If New Zealand had faced the relatively more stimulato...

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Bibliographic Details
Published in:Economic modelling 2004-12, Vol.21 (6), p.949-964
Main Authors: Drew, Aaron, Hall, Viv B., McDermott, C.John, Clair, Robert St
Format: Article
Language:English
Subjects:
Australian dollar
Common currency
Currencies
Economic models
Economic performance
Monetary policy
Monetary theory
New Zealand
Studies
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Summary:Counterfactual experiments with the Reserve Bank of New Zealand's core model provide some insight into the implications for New Zealand's economic performance over the 1990s, had it credibly fixed its currency to the Australian dollar. If New Zealand had faced the relatively more stimulatory Australian monetary conditions prevailing over the 1990s, then output growth may have been temporarily boosted. However, demand pressures would have probably been greater and inflation higher. In particular, results suggest that over the latter part of the 1990s annual inflation would have been approximately 1% point higher on average. Stochastic simulation experiments provide a vehicle to analyse what the implications of currency union might be more generally. Results suggest that if New Zealand were to lose its ability to set monetary policy independent of that set in Australia, then the variability of inflation and output would increase over the business cycle.
ISSN:0264-9993
1873-6122
DOI:10.1016/j.econmod.2003.10.008