Exchange rate volatility and currency union: New Zealand evidence

The conventional wisdom is that currency unions reduce exchange rate volatility. By definition, a currency union perfectly stabilizes the nominal exchange rate between the member countries. Nevertheless, variability in exchange rates with non-members matters too. This paper focuses on currency unions and exchange rate volatility with particular reference to New Zealand. For New Zealand, adopting either the Australian or the American dollar in the mid-1980s would not have reduced short-term exchange rate volatility. However, adopting the American dollar would have reduced cyclical exchange rate variability, and would have done so by more than a currency union with Australia. (C) 2002 Published by Elsevier Science Inc. on behalf of Society for Policy Modeling.