Nolan on commun currency
Matt Nolan at TVHE looks at the pros and cons of a common currency with Australia.
Benefits
- 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
Costs
- 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.
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.