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

Dean Scrimgeour

No DP2001/04, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

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.

JEL-codes: F31 F33 (search for similar items in EconPapers)
Pages: 33p
Date: 2001-08
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:nzb:nzbdps:2001/04

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