WOULD ADOPTING THE US DOLLAR HAVE LED TO IMPROVED INFLATION, OUTPUT AND TRADE BALANCES FOR NEW ZEALAND IN THE 1990s?

Deterministic simulations with the Reserve Bank of New Zealand’s core FPS model show how New Zealand’s broad macroeconomic environment might have evolved over the 1990s, if a US nominal yield curve and US TWI exchange rate movements under a common currency arrangement had been experienced.Relatively looser monetary conditions would have prevailed, and led to modest short-run output gains, greater excess demand pressures, noticeably higher CPI inflation rates over the whole of the 1990s, and less favourable trade balance outcomes, especially for the late 1990s.These macroeconomic outcomes are overall less favourable than those obtained from simulating the equivalent Australian monetary conditions.