How do Australian macroeconomic shocks transmit to New Zealand

Abstract

New Zealand and Australia are highly interdependent in many ways. However, New Zealand is more reliant on Australia than Australia is on New Zealand. Macroeconomic shocks are more likely to transmit from Australia to New Zealand than from New Zealand to Australia.

This thesis systematically analyses the shock-transmission channels, including trade, monetary policy, exchange rates and bank lending, from Australia to New Zealand over the period 1986Q1 to 2002Q2. It found that if New Zealand and Australia trade less, have more similar monetary policies, have less similar economic structures or have smaller bilateral exchange rates (NZD/AUD), these two countries would have stronger economic correlation. The highly integrated banking systems of Australia and New Zealand are additional avenue for shock transmission between these two countries.

The findings of this thesis reflect the importance of international coordination of monetary policies suggesting the Reserve Bank of Australia (RBA) takes the impact of Australian economy on New Zealand economy into account especially when they adopt policies that would lead AUD to depreciate. This thesis also examines whether New Zealand and Australia would have closer economic correlation after the establishment of AUFTA.