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Exchange rate volatility and Currency Union: Some theory and New Zealand evidence

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Abstract

This paper considers the effect of currency union on exchange rate volatility. At a theoretical level, a simple framework is developed for thinking about volatility and exchange rate arrangements and some inferences are drawn from it. Empirically, the interaction between currency areas and exchange rate volatility is analysed by constructing counterfactual exchange rate series for the scenarios of currency union with Australia or with the United States from 1985 to 2001. We cannot confidently conclude that New Zealand's quarter-to-quarter exchange rate volatility would have been lower in a currency union with the United States or Australia. By contrast, cyclical variability in the New Zealand exchange rate has been greater over the last sixteen years than it would have been in a currency union with either Australia or the United States.

Suggested Citation

  • Dean Scrimgeour, 2001. "Exchange rate volatility and Currency Union: Some theory and New Zealand evidence," Reserve Bank of New Zealand Discussion Paper Series DP2001/04, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbdps:2001/04
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    13. Drew, Aaron & Hall, Viv B. & McDermott, C. John & Clair, Robert St., 2004. "Would adopting the Australian dollar provide superior monetary policy in New Zealand?," Economic Modelling, Elsevier, vol. 21(6), pages 949-964, December.
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    Cited by:

    1. Eduard Hochreiter & Anton Korinek & Pierre L. Siklos, 2003. "The potential consequences of alternative exchange rate regimes: A study of three candidate regions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(4), pages 327-349.
    2. Eduard Hochreiter & Pierre Siklos, 2004. "From Floating to Monetary Union: The Economic Distance between Exchange Rate Regimes," SUERF Studies, SUERF - The European Money and Finance Forum, number 2004/5 edited by Morten Balling, May.
    3. Drew, Aaron & Hall, Viv B. & McDermott, C. John & Clair, Robert St., 2004. "Would adopting the Australian dollar provide superior monetary policy in New Zealand?," Economic Modelling, Elsevier, vol. 21(6), pages 949-964, December.
    4. Willie Lahari, 2010. "Permanent and Transitory Shocks among Pacific Island Economies - Prospects for a Pacific Islands Currency Union," Working Papers 1001, University of Otago, Department of Economics, revised Feb 2010.
    5. Willie Lahari, 2011. "Exchange Rate Volatility and Choice of Anchor Currency - Prospects for a Melanesian Currency Union," Working Papers 1111, University of Otago, Department of Economics, revised Oct 2011.
    6. Scrimgeour, Dean, 2002. "Exchange rate volatility and currency union: New Zealand evidence," Journal of Policy Modeling, Elsevier, vol. 24(7-8), pages 739-749, November.
    7. Patricia Fraser & Lynn McAlevey & Matthew Tayler, 2007. "The New Zealand market's relationship with Australia and Pacific-Basin share markets: is New Zealand converging with Australia?," Applied Financial Economics, Taylor & Francis Journals, vol. 18(6), pages 451-462.
    8. Adam Creighton, 2006. "Labour Mobility And Trans‐Tasman Currency Union," Australian Economic Papers, Wiley Blackwell, vol. 45(1), pages 38-56, March.

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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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