Nolan on commun currency

at TVHE looks at the pros and cons of a common currency with Australia.


  1. Lower transaction costs.  As Aussie is our main trading partner this is a biggie.
  2. Removes exchange rate risk for trade between nations, both in terms of relative prices and account reporting.
  3. Prevents damage from exchange rate verring from fundamental level.
  4. Makes trade protectionism more difficult.
  5. Added I would also add that, in this case, having the Aussie dollar will reduce the risk premium we have to pay for credit


  1. 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.
  2. 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.
  3. 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.
  4. Speculative attacks prior to the union.

I have not checked myself, but understand it has been very rare for the NZ Reserve Bank to be increasing interest rates while the Australian RB is lowering them, and vice-versa.

Hence it seems to me the pros rather outweigh the cons.

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