What Does the Taylor Rule Say About a New Zealand-Australia Currency Union?

9 Pages Posted: 6 Sep 2004

See all articles by Nils J. Bjorksten

Nils J. Bjorksten

Reserve Bank of New Zealand

Arthur Grimes

Motu Economic and Public Policy Research Trust

Özer Karagedikli

Reserve Bank of New Zealand

Chris Plantier

USAA

Abstract

It has been suggested that the New Zealand economy may have similar characteristics and face similar shocks to some Australian states, so lowering the costs of a trans-Tasman currency union. We test this, under the assumption that differences in Taylor rule-implied interest rate paths for different regions give an indication of differences in aggregate shocks that hit different economies. We compare implied Taylor rule interest rates for each of the Australian states to implied Taylor rule rates for New Zealand. We also compare them to realised 90-day rates. We find that the Taylor rule-implied rates in Australian states and in New Zealand are similarly correlated with actual Australian interest rates.

Suggested Citation

Bjorksten, Nils Johan and Grimes, Arthur and Karagedikli, Ozer and Plantier, L. Christopher, What Does the Taylor Rule Say About a New Zealand-Australia Currency Union?. Economic Record, Vol. 80, No. S1, pp. S34-S42, September 2004. Available at SSRN: https://ssrn.com/abstract=584054

Nils Johan Bjorksten

Reserve Bank of New Zealand ( email )

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

Arthur Grimes

Motu Economic and Public Policy Research Trust ( email )

19 Milne Terrace
Island Bay
Wellington 6002
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)

L. Christopher Plantier

USAA ( email )

Fredericksburg Road
San Antonio, TX
703-795-3102 (Phone)

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