By BRIAN FALLOW
The Institute of Policy Studies sees little, if any, harm if New Zealand hitches its wagon to the Australian dollar, and potentially a lot of good if it helps grow small businesses into medium-sized ones.
But its conclusions need to be treated with caution.
New Zealand has had a floating currency only since the mid-1980s.
Any conclusions which rest on the assumption that the future will be like the past need to recognise that only a bit of the past is being extrapolated from.
The period since 1986 included a prolonged effort by the Reserve Bank to bring endemic and virulent inflation under control, and a subsequent after-shock in the mid-1990s when it had to lean against the inflationary risks posed by an overheated housing market.
It is not surprising then that a study of the period 1986 to 1998 should find domestic monetary policy had more of an influence on the exchange rate than external factors like the terms of trade.
But hopefully we will not have to batter inflation into submission again and runaway house prices of the mid-1990s reflected factors like strong net immigration and relatively low levels of household debt which no longer apply.
Furthermore, there are grounds for hoping for a more relaxed and Australian-style approach to monetary policy from the Reserve Bank from here on.
Its riding instructions from the Government were adjusted in that direction, first in 1996, then again after the latest election.
The bank also concluded from a study of the last economic cycle jlthat there is a trade-off between variability in inflation and variability in GDP and monetary conditions.
In other words, if you are prepared to accept bigger swings in inflation, which it gets easier to do as memories of entrenched inflation recede, then you can expect less of a roller-coaster ride in growth, interest rates and the dollar.
Right now it may be hard to believe in a kinder, gentler Don Brash, given that he is in the middle of an aggressive tightening (Ian Macfarlane, his Australian counterpart, is no pussycat either).
It would seem to be prudent to wait and see how the new monetary policy approach pans out before irrevocably surrendering the right to have one.
As for the potential benefits of currency union on business development, that is a powerful argument.
But exchange rate risk is only one hurdle a baby exporter faces.
New Zealand manufacturers often struggle to compete against Australians in their own market because of persistent ``Aussie rules'' despite CER.
New Zealanders also find it hard to compete against Asian imports in Australia.
Right now preliminary talks are going on between the CER partners and Asean about a possible free trade area.
Such a development could swamp the gains from a common currency.
<i>Between the lines</i> - Currency union: what's the rush?
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