Monetary policy transmission mechanisms and currency unions: A vector error correction approach to a Trans-Tasman currency union

Alfred Haug, Ozer Karagedikli and Satish Ranchhoud
Additional contact information
Satish Ranchhoud: Reserve Bank of New Zealand, http://www.rbnz.govt.nz

No DP2003/04, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: Transmission mechanisms are the channels through which monetary policy affects macroeconomic variables, such as GDP and inflation. Differences in transmission mechanisms can generate asymmetric behaviour among currency union partners when they experience shocks. This has the potential to widen existing cyclical variation between members of a currency union. We examine the similarity of transmission mechanisms in New Zealand and Australia and consider the implications this has for a currency union between the two economies. We examine these using the Vector Error Correction methodology. While conclusions using this methodology for New Zealand and Australia remain quite fragile, our analysis nevertheless suggests that the transmission mechanisms in New Zealand and Australia do display many similarities. In particular the adjustments of both GDP and the CPI in response to monetary policy shocks appear to be very similar. However there are some differences in terms of the size of the responses of some of the variables to identical monetary policy shocks. In a currency union with a different exchange rate pattern and with different monetary policy shocks, New Zealand may experience some new challenges.

JEL-codes: C32 E50 E52 (search for similar items in EconPapers)
Pages: 31p
Date: 2003-05
New Economics Papers: this item is included in nep-ifn and nep-mon
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Monetary policy transmission mechanisms and currency unions: A vector error correction approach to a Trans-Tasman currency union (2005)
Working Paper: Monetary policy transmission mechanisms and currency unions A vector error correction approach to a Trans-Tasman currency union (2003)
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