Would Adopting the Australian Dollar Provide Superior Monetary Policy in New Zealand?

Reserve Bank of New Zealand Working Paper No. DP2001/03

16 Pages Posted: 29 Aug 2002

See all articles by Aaron Drew

Aaron Drew

Government of New Zealand - Department of Economics; Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Viv Hall

Victoria University of Wellington - School of Economics & Finance

C. John McDermott

National Bank of New Zealand

Robert St. Clair

Monetary Authority of Singapore

Date Written: August 2001

Abstract

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 around 1 percentage 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 independently, then the variability of inflation and output would increase over the business cycle.

JEL Classification: E58, F36, E31, E17

Suggested Citation

Drew, Aaron and Hall, Viv and McDermott, C. John and St. Clair, Robert, Would Adopting the Australian Dollar Provide Superior Monetary Policy in New Zealand? (August 2001). Reserve Bank of New Zealand Working Paper No. DP2001/03, Available at SSRN: https://ssrn.com/abstract=321821 or http://dx.doi.org/10.2139/ssrn.321821

Aaron Drew (Contact Author)

Government of New Zealand - Department of Economics ( email )

2 The Terrace
P.O. Box 2498
Wellington
New Zealand

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

Viv Hall

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington, 6140
New Zealand

HOME PAGE: http://www.vuw.ac.nz/sef/pages/staff/VivHall

C. John McDermott

National Bank of New Zealand ( email )

P.O. Box 540
Wellington
New Zealand

Robert St. Clair

Monetary Authority of Singapore ( email )

10 Shenton Way MAS Building
Singapore, 079117

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