The aim of this thesis is to substantiate a persuasive ease for the formation of an exchange rate union between Australia and New Zealand. The argument for such a union is derived from the unequivocal success of the Closer Economic Relations Agreement (CER). This agreement has not only reduced all barriers to trade between the countries, but it has also promted significant economic integration. The main impediment to further economic integration is the extreme volatility in the Australian/New Zealand exchange rate. Volatile exchange rates have created a risky business environment and have severely reduced the benefits that could be derived from the free trade area. The degree of trade established across the Tasman could be enhanced and improved by guaranteeing the permanent convertibility of the domestic currencies. A fixed exchange rate could facilitate the implementation of opportunities that have arisen from the CER agreement, especially in the ares of investment and international finance. It could also promote greater domestic price stability by reducing speculative capital movements into and out of the national economies. Stronger domestic economies in both New Zealand and Australia would increase their competitive position in the international economy and protect them from the powerful regional trading blocs emerging in world markets.
This thesis intends to prove that Australia and New Zealand would benefit from forming an exchange rate union. This conclusion is based on the theory of optimum currency areas. Although there are many branches' of this theory, this paper has formulated some basic criteria for a currency area to operate efficiently. The fundamental characteristics are Labour mobility, capital market integration, open economies, a varied produce range and similar inflation rates. The only significant impediment to forming a currency area between Australian and New Zealand is their different inflation rates. However, if the wages and tax policies of the countries are harmonised, as is suggested here, this problem should be eliminated. The final result is that the Australian/New Zealand exchange rate should be fixed and this reference currency should be floated against currencies of the world. To do this, a central monetary authority would have to be formed with the main objective of maintaining the fixed regional exchange rate and, thus, controlling inflation. Government policies and national laws would have to continue along their present road to harmonisation for such a union to succeed. However, as illustrated in this paper, there would seem to be no substantial, unsolvable economic reason why Australia and New Zealand should not form an exchange rate union in the near future.