Monetary policy transmission mechanisms and currency unions A vector error correction approach to a Trans-Tasman currency union

Abstract

Differences in transmission mechanisms can generate asymmetric behaviour among currency union partners when they experience shocks. This has the potential to widen existing cyclical variation between members of a currency union. Our analysis suggests that the transmission mechanisms of GDP and the CPI of a monetary shock appear to be similar in Australia and New Zealand. However, there are differences in terms of the size of the responses of some variables to identical monetary policy shocks. In a currency union with a different exchange rate pattern and with different monetary policy shocks, New Zealand may experience some new challenges.Impulse responses; vector error correction; monetary transmission mechanism