It has been suggested that the New Zealand economy may have similar characteristics and face similar shocks to some Australian states, so lowering the costs of a trans‐Tasman currency union. We test this, under the assumption that differences in Taylor rule‐implied interest rate paths for different regions give an indication of differences in aggregate shocks that hit different economies. We compare implied Taylor rule interest rates for each of the Australian states to implied Taylor rule rates for New Zealand. We also compare them to realised 90‐day rates. We find that the Taylor rule‐implied rates in Australian states and in New Zealand are similarly correlated with actual Australian interest rates.
Evidence suggests that after a period of convergence in the early and mid 1990s, the euro area economies may have started diverging. As a consequence, the common monetary policy could become less well-suited for a number of countries. This paper studies the extent and severity of the recent divergences, and discusses the capacity of exposed countries to compensate for nationally suboptimal monetary conditions through other policy channels. As a step toward developing an analytical framework for monitoring intra-euro area developments, we present a "convergence barometer" to monitor divergences, and a Taylor rule based "monetary thermometer" to compare the common monetary policy to benchmark optimal policy for individual countries. A main conclusion is that policymakers at the euro area level should be concerned about divergences, since automatic stabilisers alone may not be enough to restore a healthy equilibrium to potential "outlier" countries.
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