International Journal of Business and Economics

International Journal of Business and Economics
Volume 2, No. 2

August, 2003
Common Trend and Common Currency: Australiaand New Zealand
Minsoo Lee
Department of Economics, Lincoln University, New Zealand
This note empirically examines the existence of common trend between the bilateral real exchange rates of Australia and New Zealand with two of their major trading partners, Japan and the United States, as base countries. Results from Johansen cointegration analysis show that New Zealand and Australia bilateral real exchange rates with Japan as the base country share a common stochastic trend, which can be interpreted in terms of an optimum currency area. This no longer holds should the United States be selected as the base country. This might shed light on the impact of comparative advantage in the regional trade among Australia, New Zealand, and Japan in a liberalized environment.
Keywords: common trend, optimum currency area, generalized PPP.
JEL Classifications:C32, F31.