Monetary Policy Transmission Mechanisms and Currency Unions: A Vector Error Correction Approach to a Trans-Tasman Currency Union

17 Pages Posted: 10 Sep 2003

See all articles by Alfred A. Haug

Alfred A. Haug

University of Otago - School of Business - Department of Economics

Özer Karagedikli

Reserve Bank of New Zealand

Satish Ranchhod

Reserve Bank of New Zealand

Abstract

Transmission mechanisms are the channels through which monetary policy affects macroeconomic variables, such as GDP and inflation. Differences in transmission mechanisms can generate asymmetric behaviour among currency union partners when they experience shocks. This has the potential to widen existing cyclical variation between members of a currency union. We examine the similarity of transmission mechanisms in New Zealand and Australia and consider the implications this has for a currency union between the two economies. We examine these using the Vector Error Correction methodology. While conclusions using this methodology for New Zealand and Australia remain quite fragile, our analysis nevertheless suggests that the transmission mechanisms in New Zealand and Australia do display many similarities. In particular the adjustments of both GDP and the CPI in response to monetary policy shocks appear to be very similar. However there are some differences in terms of the size of the responses of some of the variables to identical monetary policy shocks. In a currency union with a different exchange rate pattern and with different monetary policy shocks, New Zealand may experience some new challenges.

JEL Classification: C32, E50, E52

Suggested Citation

Haug, Alfred A. and Karagedikli, Ozer and Ranchhod, Satish, Monetary Policy Transmission Mechanisms and Currency Unions: A Vector Error Correction Approach to a Trans-Tasman Currency Union. Journal of Policy Modeling, Vol. 27, February 2005. Available at SSRN: https://ssrn.com/abstract=412400 or http://dx.doi.org/10.2139/ssrn.412400

Alfred A. Haug

University of Otago - School of Business - Department of Economics ( email )

PO Box 56
Dunedin
New Zealand

Ozer Karagedikli (Contact Author)

Reserve Bank of New Zealand ( email )

2 The Terrace
P.O. Box 2498
Wellington, 6011
New Zealand
64 4-471-3792 (Phone)
64 4-473-1209 (Fax)

Satish Ranchhod

Reserve Bank of New Zealand

2 The Terrace
P.O. Box 2498
Wellington, 6011
New Zealand

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