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How New Zealand adjusts to macroeconomic shocks: implications for joining a currency area

Sharon McCaw, Dr John McDermott

This is a continuation of a series of articles on what the costs and benefits might be if New Zealand were to join a larger currency area, say if it were to enter into currency union with Australia, or to ‘dollarise’. The back-drop is public debate, in New Zealand and in some other countries, on currency union possibilities. In this article we consider how the New Zealand economy might adjust to shocks if it were a member of a currency union. In a currency union the exchange rate can no longer act as a mechanism of adjustment. Consequently, we consider the role of alternative adjustment mechanisms, such as migration, price and wage flexibility, and fiscal adjustment.