An Australasian Currency, New Zealand Adopting the Us Dollar, or an Independent Monetary Policy?

Abstract:     
Arguments for and against abandoning independent national currencies and monetary policies have varied considerably over time and by country. For New Zealand, it can be argued that a key driving force behind recent debates has been the conduct of monetary policy and the need for improved overall economic performance in the longer term, rather than major dissatisfaction with its floating exchange rate system. In that context, this paper initially considers some issues considered important by other countries, and factors specific to New Zealand. It then utilises deterministic and stochastic simulation results from the RBNZ’s core FPS model, to illustrate what New Zealand’s inflation, output and trade outcomes might have been, had it faced US or Australian interest rate and exchange rate movements of the 1990s. The paper concludes with some implications for future research, and some ways forward for New Zealand policy.

Keywords: National Currency, Joint currency, Monetary Policy, Exchange rate system, FPS model

JEL Classification: E42, E52, E58

Accepted Paper Series