This working paper was commissioned by the Wellington: Institute of Policy Studies
This study is about currency union. Should New Zealand remain the smallest industrialised country to run an independent monetary policy? Should New Zealand instead adopt the Australian dollar or some hybrid such as a combined ANZAC dollar? Should it adopt the United States dollar or seek a three-way bloc with both Australia and the United States?
The authors analyse political and economic issues relevant to these matters:
the trans-Tasman relationship in the context of CER;
the political economy of changing currencies;
the role of the exchange rate in cushioning and/or exacerbating shocks;
a major survey of business attitudes and practices regarding currency management.
They conclude that the Australian dollar (AUD) and the US dollar (USD) would not be materially worse than the floating New Zealand dollar in cushioning New Zealand's external (terms of trade) shocks. By diversifying against a broader range of shocks, a link to a larger currency area (e.g. the AUD or USD) may result in a beneficial regime change. Businesses are strongly of that opinion and there is little economic evidence to the contrary. A link to a larger currency may encourage new firms to locate in New Zealand to service the broader market. It may also enable existing New Zealand firms to expand into exporting where that is currently perceived as being too risky as a result of exchange rate volatility. Advantages, especially through joining a USD-based bloc, could also accrue through reductions in funding costs. Given these factors, and the overwhelmingly supportive views of business, the option of adopting a common currency area with the AUD and/or the USD must be taken seriously by all those who seek to boost conditions for economic development within New Zealand.