Exchange Rate Volatility and Choice of Anchor Currency - Prospects for a Melanesian Currency Union

Willie Lahari ()
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Willie Lahari: Department of Economics, University of Otago

No 1111, Working Papers from University of Otago, Department of Economics

Abstract: This paper investigates an appropriate choice of anchor currency for a proposed Melanesian currency union under various hypothetical currency union arrangements. Drawing from the optimal currency area (OCA) theory and related extensions, the analysis focuses on the effects of a currency union on exchange rate volatility following similar approach by Scrimgeour (2002). Counterfactual exchange rate series are constructed for alternative scenarios for Melanesia with the following major trading partners: Australia, New Zealand, USA and Japan. The main findings showed that both short-term and cyclical exchange rate volatility are generally lower in a currency union with either Australia or New Zealand. However, the results vary under varying weights and currency baskets. Choosing a single common anchor currency based solely on exchange rate volatility may not be conclusive. Hence, further research is required, for example, in considering the effects of a currency union on volatility in output, inflation or interest rates.

Keywords: Exchange Rate Volatility; Currency Union; Melanesian Countries (search for similar items in EconPapers)
JEL-codes: F15 F31 F33 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2011-10, Revised 2011-10
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http://www.otago.ac.nz/economics/research/otago076669.pdf First version, 2011 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:otg:wpaper:1111

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