There is a little bit of talk about a ANZAC currency I see. Lets be honest here, this effectively implies that New Zealand would be adopting the Aussie dollar. I remember arguing about this with my brother a while back, he was pro I was against. Nowadays, I’m not sure – I’d like to see a few studies on it first.
Now there are costs and benefits from such a currency union. Pages 633-634 in “Foundations of international macroeconomics” by Obstfeld and Rogoff covers these off as follows:
- Lower transaction costs. As Aussie is our main trading partner this is a biggie.
- Removes exchange rate risk for trade between nations, both in terms of relative prices and account reporting.
- Prevents damage from exchange rate verring from fundamental level.
- Makes trade protectionism more difficult.
- Added I would also add that, in this case, having the Aussie dollar will reduce the risk premium we have to pay for credit
- Can’t use monetary policy to compensate for region specific shocks – dairy price crashes and we can’t use a lower interest rate to help buffer the fall. This is the primary concern.
- Can’t use inflation to lower public debt – our monetary policy is now determined by Aussie. However, we don’t do this so it doesn’t matter.
- As fiscal policy is independent it can cause issues with splitting “seigniorage revenue“. With a low inflation target this is not a biggie at all.
- Speculative attacks prior to the union.