Exchange Rate Volatility and Choice of Anchor Currency - Prospects for a Melanesian Currency Union
Lahari, Willie
Cite this item:
Lahari, W. (2011). Exchange Rate Volatility and Choice of Anchor Currency - Prospects for a Melanesian Currency Union (Economics Discussion Papers Series No. 1111). University of Otago. Retrieved from http://hdl.handle.net/10523/2064
Permanent link to OUR Archive version:
http://hdl.handle.net/10523/2064
Abstract:
This paper investigates an appropriate choice of anchor currency for a proposed Melanesian currency union under various hypothetical currency union arrangements. Drawing from the optimal currency area (OCA) theory and related extensions, the analysis focuses on the effects of a currency union on exchange rate volatility following similar approach by Scrimgeour (2002). Counterfactual exchange rate series are constructed for alternative scenarios for Melanesia with the following major trading partners: Australia, New Zealand, USA and Japan. The main findings showed that both short-term and cyclical exchange rate volatility are generally lower in a currency union with either Australia or New Zealand. However, the results vary under varying weights and currency baskets. Choosing a single common anchor currency based solely on exchange rate volatility may not be conclusive. Hence, further research is required, for example, in considering the effects of a currency union on volatility in output, inflation or interest rates.
Date:
2011-10-01
Publisher:
University of Otago
Series number:
1111
ISSN:
1178-2293
Keywords:
Exchange Rate Volatility; Currency Union; Melanesian Countries
Research Type:
Discussion Paper
Languages:
English
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