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What Does the Taylor Rule Say About a New Zealand–Australia Currency Union? *
Author(s) -
BJÖRKSTEN NILS,
KARAGEDIKLI ÖZER,
PLANTIER CHRISTOPHER,
GRIMES ARTHUR
Publication year - 2004
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2004.00182.x
Subject(s) - taylor rule , currency union , currency , economics , interest rate , home rule , common currency , monetary economics , monetary policy , econometrics , macroeconomics , international economics , political science , central bank , law , politics
It has been suggested that the New Zealand economy may have similar characteristics and face similar shocks to some Australian states, so lowering the costs of a trans‐Tasman currency union. We test this, under the assumption that differences in Taylor rule‐implied interest rate paths for different regions give an indication of differences in aggregate shocks that hit different economies. We compare implied Taylor rule interest rates for each of the Australian states to implied Taylor rule rates for New Zealand. We also compare them to realised 90‐day rates. We find that the Taylor rule‐implied rates in Australian states and in New Zealand are similarly correlated with actual Australian interest rates.