Is there a sufficient risk sharing between Australia and New Zealand?

In recent years, there has been much debate on whether or not countries in a region should adopt a common currency. One of the criteria for assessing the suitability of forming a currency union is whether there is a sufficient risk-sharing mechanism in operation. Although adopting a common currency is expected to improve the degree of risk sharing and hence welfare gains, identifying the channels and degree of risk-sharing should precede any practical debates on the formation of a currency union. It is widely assumed that states and territories of a federal system such as in Australia and the United States are close to constituting an optimal currency area. By using the analytical framework developed by Asdrubali et al. (1996), we report on the channels of risk-sharing both within Australia and between Australia and New Zealand. We also extend our analysis to explore how dynamic risk-sharing takes place between Australia and New Zealand and aim to quantify the extent of dynamic risk sharing at various time horizons. Findings from our research would help improve our understanding on the following issues: (i) the role of fiscal policy in risk-sharing, and (ii) the suitability of a common currency area between Australia and New Zealand.