Mr Brash addresses the subject of the New Zealand dollar and the recent business cycle
Address by the Governor of the Reserve Bank of New Zealand, Dr Donald T. Brash, to the
Canterbury Employers' Chamber of Commerce in Christchurch on 29/1/99.
Introduction
Mr Chairman, Ladies and gentlemen,
I am delighted to be addressing you once again, on your first meeting of the New Year. If my
memory is correct, this is the sixth occasion on which I have done this, and I appreciate your
courtesy and tolerance in inviting me back each year.
Last year, I addressed the subject of New Zealand's balance of payments deficit. Today, I want to
talk a little about a related issue, the exchange rate and its behaviour in recent years, because I
recognise that, in an export-oriented economy like that of Christchurch, the exchange rate has a
substantial impact on the viability of many businesses. I feel relatively safe in Christchurch
today, with the trade-weighted measure of the New Zealand dollar around 57, but I felt distinctly
less secure when I was here just two years ago, with the TWI up around 69! And certainly the
appreciation from around 53 in early 1993 to 69 in early 1997, or an appreciation of some 30 per
cent in four years, made life very difficult for many businesses.
Eleven years have passed since the Minister of Finance first gave the Reserve Bank of New
Zealand an explicit, quantitative, inflation target, and we have now experienced one full business
cycle under that inflation targeting regime, from recession in 1991 to recession in the first half of
1998. For this reason, it seemed like an opportune time for us in the Bank to review that
experience to see what we could learn. Accordingly, over much of the last year, we have been
doing a careful study of the evolution of the New Zealand economy during the nineties. And to
me at least, the results of that review are intensely interesting. Some of them were published just
prior to Christmas in the December 1998 issue of the Reserve Bank's quarterly Bulletin, while
others will be published in the March Bulletin.
I can't even begin to summarise all of these results, but I want to record a few of them, as they
relate to the appreciation of the New Zealand dollar between early 1993 and early 1997. In
particular I want to address four questions:
• Why did the appreciation take place?
• Was the appreciation in some sense abnormal or unusual?
• What part did the Reserve Bank play in the appreciation?
• Can large appreciations be avoided in the future?
First, why did the appreciation take place?
When we look back over the last business cycle, from the recession in 1991 to the recession in
the first half of 1998, one of the dominant impressions is that the New Zealand economy grew
for longer than in either of the two previous business expansions. An even stronger impression is
of an economy growing at quite a fast pace, certainly in comparison to growth in most other
developed countries. Indeed, in 1993 GDP growth peaked at 7.1 per cent and, while growth
slowed from that point on, the slow-down was quite mild by historical standards. The result was
that economic growth in New Zealand exceeded the average growth among 18 OECD countries
from 1992 to late 1996. By the December quarter of 1997, the New Zealand economy was 25 per
cent larger in real terms than it had been at the trough of the recession in 1991. (See Figure 1.)
Figure 1
Real GDP growth: New Zealand and selected OECD countries
(Sources: Statistics New Zealand, International Financial Statistics, RBNZ calculation)
At the same time as we were enjoying that relatively rapid growth, inflation (as measured by the
CPI excluding interest rates) was both low and stable, fluctuating between a minimum of 1.1 per
cent and a maximum of 2.7 per cent between 1991 and the present. In the early part of that
period, inflation was slightly below the average for these OECD countries, while in the later part
of the period, New Zealand's inflation rate was virtually identical to the OECD average. (See
Figure 2.)
But although actual inflation was subdued, inflationary pressures were, for several years at least,
intense. The New Zealand economy initially expanded more rapidly than several of its major
trading partners, fuelled at the outset by rapid export growth but sustained by strong growth in
investment and consumption, and, later, by strong inward migration and an expansive fiscal
stance. The prices of goods and services not exposed to international competition rose
significantly faster than the average increase in all prices. There can be little doubt that our
inflation rate would have been appreciably higher - that is, more typical of the seventies and
eighties - had monetary policy not been leaning hard against those inflationary pressures.
Figure 2
Annual inflation rates: New Zealand and selected OECD countries
(Sources: Statistics New Zealand, International Financial Statistics, RBNZ calculation)
And of course 'leaning hard against inflationary pressures' is a euphemism for pushing up real
(inflation-adjusted) short-term interest rates. In 1992, our real short-term interest rates were
actually lower than the OECD average; in 1993, they were very close to the average; but from
1994 until some six months ago they were well above the OECD average. (See Figure 3.)
Figure 3
Short-term real interest rates: New Zealand and selected OECD countries
(Sources: RBNZ, International Financial Statistics, RBNZ calculation)
While various factors help to explain why the New Zealand dollar appreciated from early 1993 to
early 1997, our research suggests that the dominant explanation is the obvious one, namely the
relative strength of the domestic economy and the resulting inflation pressures. Those
inflationary pressures necessitated significant monetary restraint, as reflected in the rise in New
Zealand's short-term interest rates relative to those in our trading partners. Higher interest rates
in New Zealand than elsewhere ensured plenty of demand for New Zealand dollar assets, which
is another way of saying that there was upward pressure on the exchange rate. In other words, the
strong appreciation of the mid-nineties was the direct result of demand growing to the point
where inflationary pressures would have pushed up measured inflation markedly had it not been
for firm monetary policy. It was not until the domestic inflation pressures had clearly dissipated
that the TWI began to depreciate, around May 1997.
Secondly, was the appreciation in some sense abnormal or unusual?
It is helpful in answering this question to look not at the movement in the nominal exchange rate
but at the movement in the real (inflation-adjusted) exchange rate. Figure 4 shows the real
exchange rate measured on a trade-weighted basis. What the graph shows is that the real
exchange rate rose between early 1993 and April 1997 by 29 per cent, compared with an increase
of 36 per cent between late 1984 and mid 1988. So the most recent appreciation was slightly
smaller than the one experienced in the mid- to late eighties.
Figure 4
New Zealand trade-weighted real exchange rate
(Source: RBNZ)
Another important point can be seen in the graph, and that is that, although some exporters are
particularly prone to measuring exchange rate appreciations from the very bottom of an exchange
rate cycle, it is as unrealistic to imply that the bottom of the cycle is in some way the norm as it
would be to imply that the top of the cycle is the norm. The real exchange rate goes through
cycles, sometimes appreciating above its long-run average and sometimes depreciating below its
long-run average.
In early 1993, it is quite clear that the New Zealand dollar was significantly below its long-run
average, and no exporter should have been expecting that the exchange rate would continue
indefinitely at those levels. In early 1997, it is equally clear that the New Zealand dollar was
significantly above its long-run average, indeed above its long-run average to almost exactly the
same extent as had been the case in the middle of 1988 (almost 12 per cent). Today, the real
exchange rate again seems to be somewhat below its long-term average level. Given New
Zealand's relatively low short-term interest rates, and the size of our current account deficit, I do
not myself expect any rapid change in that situation. Indeed, any strong appreciation of the New
Zealand dollar at this stage would be surprising. But on the other hand it is no more reasonable to
expect the exchange rate to remain below its long-term average indefinitely than it is to expect it
to remain above that level for a lengthy period.
But, I am often asked, why do we have to endure these big appreciations at all? Surely other
countries have managed their affairs without suffering from such strong appreciations? Well,
some may have done so, but it is not at all difficult to find other countries which have
experienced similarly strong real appreciations in the recent past, including Japan (an
appreciation of 62 per cent from 1990 to 1995), the United Kingdom (an appreciation of 31 per
cent from 1995 to mid-1998), Germany (an appreciation of 25 per cent from 1991 to 1995), and
the United States (an appreciation of 24 per cent from 1995 to mid-1998). Indeed, Japan's real
appreciation was very substantially greater than New Zealand's, while Britain's was somewhat
greater and over an even shorter period. And of course none of these countries is small or
particularly prone to being buffeted by international shocks. (See Figure 5.)
Figure 5
Recent episodes of exchange rate appreciation
(Sources: RBNZ, International Financial Statistics)
But what about Australia? Surely Australian exporters have not been so badly affected by
movements in their real exchange rate as New Zealand exporters were? To be sure, the
Australian real exchange rate appreciated rather less strongly than the New Zealand dollar did in
the mid-nineties but, as Figure 6 shows, over the whole period since 1980 it is not immediately
obvious that the Australian real exchange rate has behaved in ways which have been kinder to
exporters than the New Zealand dollar has. Indeed, looking at the volatility of real exchange
rates, while the Australian dollar has clearly been through a more subdued cycle than has the
New Zealand dollar over the last five years, taking the eighties and nineties together the volatility
of the Australian dollar (in real terms) has been somewhat greater than has that of the New
Zealand dollar.
Figure 6
Trade-weighted real exchange rates: Australia and New Zealand
(Sources: RBNZ, International Financial Statistics)
There are various reasons why the Australian dollar appreciated more modestly than did the New
Zealand dollar during the most recent business cycle: Australia's commodity prices were weaker
than were New Zealand's at various times during the nineties, and more generally Australia had
more subdued inflationary pressures, requiring less firm monetary conditions, than New Zealand
did. My point is simply that it would be unwise to assume, on the basis of one cycle, that
Australia has found some enduringly relevant way of avoiding strong exchange rate
appreciations.
A comparison of New Zealand with Singapore and Hong Kong is also interesting perhaps, since
they are two small, very open, economies, one of them operating a managed float and the other a
currency board peg to the United States dollar. Both economies are often held out as models of
economic management, and certainly are economies which have, over many years, achieved
strong export growth. If we consider the period of maximum New Zealand dollar real
appreciation, from late 1992 to April 1997, we see that the New Zealand dollar appreciated by
rather more than did either the Hong Kong dollar or the Singapore dollar over the same period.
But if we consider the whole of the nineties, from January 1990 to late 1998, we find that over
that longer period the New Zealand dollar ended up at almost exactly the same point as it started
in real terms, whereas the Singapore dollar appreciated by some 12 per cent, and the Hong Kong
dollar, pegged though it was to the US dollar, appreciated by a very substantial 39 per cent.
(Figure 7.)
Figure 7
Real exchange rates: New Zealand, Singapore and Hong Kong
(Source: JP Morgan)
The conclusion we reached from all this analysis is that the appreciation of the New Zealand
dollar in the mid-nineties was not unusual, either internationally or in terms of our own history.
Thirdly, what part did the Reserve Bank play in the appreciation?
This may seem a very odd question, since I have already acknowledged that the main factor
driving up the exchange rate in the mid-nineties was the need to tighten monetary policy to head
off the inflationary pressures caused by demand growing faster than the potential of the New
Zealand economy to meet that demand. This pushed up not only the nominal exchange rate, but
also the real (inflation-adjusted) exchange rate.
But suppose the Reserve Bank had acted differently. Would matters have been much different?
The answer is 'almost certainly not'. Suppose the Bank had not tightened monetary policy. At
some point, the rise in the price of houses and other goods and services in the non-tradeable
sector of the economy would have begun to spill over into the general price level. Wages and
other costs would have started to rise. Other things the same, exporters would have found
themselves squeezed by these rising costs. In other words, they would have been squeezed by a
rise in the inflation-adjusted exchange rate. So no matter what policy the Bank had pursued, the
real exchange rate would have appreciated considerably, and exporters would have been put
under pressure. The only issue is whether the real exchange rate appreciation took place
alongside low inflation within New Zealand or whether it took place through an inflation
blowout within New Zealand.
It is fair to acknowledge, however, that the way in which the Reserve Bank sees the exchange
rate in the implementation of monetary policy has evolved over the years.
In the first years of the fight against inflation, the Bank paid very little attention to the exchange
rate. In the years immediately following deregulation, both interest rates and the exchange rate
were very volatile. We had very little sense of what 'normal' levels for these prices were, and
hence put little weight on movements in them when we were thinking about monetary policy and
the outlook for inflation. Instead, we paid particular attention to keeping the quantity of 'primary
liquidity' stable.
By the time I became Governor of the Bank in 1988, we had come to recognise that the very
short-term volatility in interest and exchange rates was largely unnecessary, and might well have
real costs - if only in obscuring the price signals facing investors and producers in the real
economy. As inflation targeting became more formalised, we tended to implement monetary
policy by making a careful assessment of all the factors relevant to inflationary pressures, and
then working out some internal 'comfort zones' for the key financial prices. These were not
targets in the sense that we were totally dedicated to maintaining interest or exchange rates
within these ranges. But they were designed to shape our own thinking, and to guide us in
deciding when it made sense to take some action to limit movements in interest or exchange rates
between the periodic reassessments of the inflation outlook.
Over time, the exchange rate band became increasingly prominent. This was partly because we
had little formal sense of the linkage between interest rates and inflation, whereas we did have
statistical estimates of the direct effect, other things being equal, of a movement in the exchange
rate on prices - in other words, the effect of a movement in the exchange rate on the New
Zealand dollar price of imports and things like meat and milk which were also exported. Largely
because the inflation outlook was still so uncertain during the disinflation period, but also
because we thought we had a reasonable handle on the direct price effects of changes in the
exchange rate, monetary policy often tended to be focused principally on the inflation outlook
over the following 12 months or so.
By the mid-nineties, this approach was becoming increasingly less relevant. Our confidence that
a 1 per cent movement in the trade-weighted exchange rate would produce a change in consumer
price inflation of about 0.3 per cent within about 12 months began to wane, as first the
depreciation of 1991 and then the appreciation of 1993-97 produced a much smaller impact on
inflation than previous research had suggested. Indeed, by the end of 1995 reference to 'exchange
rate comfort zones' had largely disappeared from our monetary policy implementation lexicon.
The impact of interest rates on inflation was becoming more evident, and in particular it became
clear that the low interest rates of 1992 and 1993 were, with a lag of more than a year,
encouraging strong credit growth, rapidly increasing house prices, and inflationary pressures in
the domestic sectors of the economy.
More importantly, with inflation having been within the agreed target for 1991, 1992, 1993, and
1994, there was also gradually increasing confidence, within financial markets and, to a lesser
extent, in the general public, that the commitment to low inflation was credible. This increased
credibility meant that we could afford to be less concerned about the one-off direct price effects
of exchange rate movements. Even if we had had a lot of confidence in our estimates of the size
and timing of these effects, the risk that they would spill over into higher inflation expectations,
creating ongoing problems, was much diminished. While mindful that a change in the exchange
rate might in itself be telling us that monetary policy had become inappropriate, we could afford
to focus mainly on the medium-term channels by which interest and exchange rates affect the
ongoing rate of inflation. In recent years this has meant trying to focus more on the inflation
outlook 18 to 24 months ahead.
Keeping that medium-term focus means recognising that monetary policy mistakes take time to
correct - that even if we could turn our monetary policy super-tanker very quickly it might not be
sensible to do so.
To illustrate, in April 1996, when the Minister of Finance requested an explanation of inflation
falling outside the agreed target by 0.1 per cent, I advised him that indications at that time were
that inflation might remain outside the target for two or three more quarters. Despite this, I
advised him that we did not intend to tighten policy sufficiently to avoid those further breaches
since the only way that that could have been achieved would have been through a very aggressive
tightening of policy that would have both created a risk of going below the inflation target the
following year and considerably exacerbated the exchange rate and interest rate cycle. What we
were implicitly recognising is that, while monetary policy can not be used to engineer a
sustainably faster growth rate in the long-term, there can be a trade-off between the variability of
inflation and the variability of monetary conditions in the short-term.
In late 1996, of course, the inflation target was amended from 0 to 2 per cent to 0 to 3 per cent
and, though not requested by the Reserve Bank, this increased the scope for flexibility when
faced with the many lags and uncertainties in setting monetary policy.
All of these factors drove us in the direction of being less concerned about the direct price effects
of exchange rate movements and more concerned about the medium-term effects of interest rates
and the exchange rate. Our focus lengthened from a primary interest in the next 12 months to an
18 to 24 month view.
So in short, over the decade we have moved from a primary focus on the relatively short-term
direct price effects of exchange rate movements as a way of reducing inflation, when there was
an urgent need to reduce inflation quickly and where the credibility of policy was very low, to a
focus on the medium-term effects of interest and exchange rates on the real economy, and
therefore on inflation. In large part this change has been made possible by the increased
confidence within the community that the Reserve Bank will continue to deliver stable prices, the
result in turn of eight years of low and stable inflation.
Finally, can large appreciations be avoided in the future?
Let me say first that a gradually appreciating exchange rate is something to which all countries
should aspire. A trend appreciation in the real exchange rate is usually the direct result of a
country's relatively superior record of productivity improvement, and that is obviously
something to aspire to. A trend appreciation in the nominal exchange rate may arise from that
superior record of productivity improvement or it may arise from a superior record of keeping
inflation under control. And I think most New Zealanders, including most exporters, would
welcome an appreciation which arises from one or both of those factors.
But what we are talking about here is the kind of appreciation which raises the New Zealand
dollar by close to 30 per cent over three or four years, faster than any plausible increase in
relative productivity or inflation performance. Can that be avoided? Can we even reduce the
amplitude of the swings around the long-run average from, say, plus or minus 12 per cent to, say,
plus or minus 5 per cent? If I could assure you that the Reserve Bank is confident that it can
operate monetary policy without the risk of such large fluctuations in future, I would leave here a
much more popular man, and you would leave here feeling very much happier too.
Unfortunately, I can give you no such assurance.
In principle, the ways in which large and rapid appreciations might be avoided are of four kinds.
First, to the extent that large appreciations are a function of firm monetary policy, one option
might be to resist inflationary pressures less vigorously. Alas, all the evidence from our own and
international experience suggests that allowing inflationary pressures to become more embedded
in the economy makes the subsequent job of eliminating inflation much more difficult. In other
words, when inflationary expectations become more deeply embedded in society, eliminating
inflation requires more pressure from monetary policy, higher real interest rates and a higher real
exchange rate, not the reverse. And in any event, as already indicated, failing to resist an increase
in inflation still leaves exporters facing a loss of competitiveness because of the increase in the
domestic costs which they face. The United States, the United Kingdom, Germany, and Japan all
approach keeping inflation low in rather different ways, but all have experienced periods of sharp
exchange rate appreciation this decade.
The second way in which we might avoid strong appreciations in the future is to avoid, or at least
to minimise, the situations where a strong tightening of monetary policy is required. In part, this
is a Reserve Bank responsibility, and involves our being quick to spot situations where demand
looks likely, 18 to 24 months ahead, to exceed the economy's sustainable capacity to deliver. We
are doing a great deal of work to assist us in forecasting but, as I have remarked on several
occasions before, no matter how good our research, no matter how good the statistical data on
which we make decisions, no matter how good our formal and informal information networks,
no matter how good our models, by the nature of the case the future will often turn out very
differently to our expectations. Neither we nor any other central bank has a perfect crystal ball.
This means that there is simply no guarantee that we will be able to avoid vigorous tightening of
monetary policy in the future.
Some have suggested that monetary policy would not have needed to tighten so aggressively in
the mid-nineties if fiscal policy - government taxation and spending policy - had not been so
expansionary. It is certainly true that, after acting to dampen aggregate demand in the early
nineties, fiscal policy became rather more expansionary in the mid-nineties, and this required
monetary policy to be tighter than would otherwise have been necessary at that time. To that
degree, the stimulatory fiscal policy of 1996 and 1997 must bear some of the blame for the strong
appreciation of the exchange rate. Moreover, there can be little doubt that, if strong appreciations
are to be avoided in the future, a full recognition of the monetary policy implications of changes
in fiscal policy will be imperative.
But it has to be acknowledged that it is not always easy to adjust fiscal policy to take account of
cyclical pressures, for reasons which are sometimes technical and sometimes political. Indeed,
some would argue that the Fiscal Responsibility Act is based on the premise that adjusting fiscal
policy in response to cyclical pressures is neither necessary nor appropriate.
New Zealand's experience in 1996 and 1997 illustrates some of the technical problems well. In
late 1995, the Government publicly announced that they would proceed with a reduction in
income tax rates in mid-1996 only if the Reserve Bank were satisfied that the tax cuts could take
place without putting undue pressure on monetary conditions. We were formally asked if the tax
cuts could proceed without creating such upward pressure on monetary conditions, and after
careful consideration we formally advised Government that we believed the tax cuts would not
create any undue upward pressure on monetary conditions. As Reserve Bank watchers may
recall, this was close to the time when we reached the judgement, in October 1995, that
inflationary pressures were abating and that some easing in monetary conditions might be
appropriate. We in the Bank, others in the Treasury, and many private sector forecasters all felt
that the economy would slow down markedly in 1996, and that the proposed fiscal stimulus
would not create undue pressure on monetary conditions.
In retrospect, our judgement was incorrect: inflationary pressures in the economy had not eased
by as much as we thought at the time and, as it turned out, a firm monetary policy had to be
maintained for a further year. And of course, by the time we thought that the outlook was
sufficiently subdued that monetary restraint could be eased without inflation becoming a
problem, the Asian crisis was about to break. This course of events serves to underscore just how
difficult it is to fine tune monetary policy, and why I am reluctant to claim that swings in the
exchange rate are a thing of the past.
There may also be difficult political obstacles in using fiscal policy to carry some of the load
otherwise carried by monetary policy. In late 1995, the New Zealand public sector was in very
substantial operating surplus and, in the absence of tax cuts or increases in government spending,
that surplus looked likely to continue indefinitely. Even leaving aside the fact that both the
Reserve Bank and other forecasters mis-read what was likely to happen to the economy in 1996,
it could well have been difficult to persuade any Parliament in those circumstances to forego tax
cuts or increases in government spending. In the end we got both, and part of the price may well
have been a continuation of strong exchange rate appreciation for longer than anybody in the
export sector enjoyed.
Thirdly, measures might be taken to drive a wedge between New Zealand interest rates and
foreign interest rates, so that when monetary policy is tightened in New Zealand to head off
inflationary pressures this does not result in an appreciation of the exchange rate, or at least
results in a rather smaller appreciation than otherwise.
Various countries try to do this. Some, for example, have tried to cut themselves off from
international capital markets by instituting comprehensive controls on capital flowing into and
out of the country, of the kind that New Zealand used to have. Few would seek a return to this
kind of regime in New Zealand and indeed, even in the countries of Asia which have been most
affected by recent turbulence, few have seen the benefits of such controls as likely to exceed their
very substantial costs. Those who advocate such controls usually do so only for countries which
have not yet got their macro-economic policies in order, or which have serious weaknesses in
their financial systems. In other words, controls of this kind are often seen as a temporary or
transitional measure, while more fundamental weaknesses are addressed.
Other countries have tried to drive a wedge between domestic and foreign interest rates by
instituting a tax on interest income accruing to foreigners, a non-resident withholding tax. In
principle, this has considerable appeal because it means domestic interest rates can be pushed up
to a level appropriate to the restraint of domestic inflationary pressures while not encouraging a
strong capital inflow which would push up the exchange rate. But New Zealand's own
experience suggests that it is in fact quite difficult to make such taxes work effectively, since
there are lots of ways in which foreign investors, working in conjunction with locals, can find
ways around that tax.
Some academic economists have suggested that countries institute a small tax on all foreign
exchange transactions, a so-called Tobin tax after the economist who first proposed it, in order to
discourage speculative capital flows. But very few policy-makers give such a tax any chance of
being implemented and, if implemented, of actually working as intended. To be effective, it
would need to be applied in all countries at the same rate, lest foreign exchange transactions
simply migrate to a country where the tax is not applied. And if this substantial hurdle could be
overcome, most observers believe that the effect of the tax would be to substantially diminish
liquidity in financial markets, so that large 'beneficial' transactions would produce very large
movements in the exchange rate. Worse still, there seems little prospect of such a tax deterring
large-scale capital flight: who will resent paying, say, a 0.1 per cent Tobin tax if he fears a 30 per
cent devaluation?
The only serious contender on the international stage at present as a way to drive a wedge
between domestic and foreign interest rates is the so-called Chilean approach. In principle, that
involves no restrictions on capital outflow and no restrictions on incoming foreign direct
investment, but a requirement that a proportion (initially 30 per cent but later reduced to 10 per
cent) of incoming portfolio investment be deposited with the central bank at zero interest for a
period of one year. The intention of this measure was to discourage short-term capital inflow
while creating no barriers to other forms of capital movement. Whether such a measure would
work in the relatively sophisticated financial markets which we now have in New Zealand is at
this stage an open question. Indeed, there is intense debate internationally whether the policy has
even had a beneficial effect in Chile itself, and Chile has recently reduced the proportion of
incoming portfolio investment which must be deposited with the central bank to zero. As I noted
in my speech on the balance of payments deficit last year, there would clearly be some real risks
in introducing such a policy in New Zealand, not least the longer-term costs of undermining
investor confidence in New Zealand's commitment to free and open markets.
A fourth idea for avoiding strong exchange rate appreciations has recently been gaining some
media play, namely the idea that New Zealand should irrevocably peg to some larger currency, or
even form a currency union with some larger country or group of countries. The New Zealand
dollar is simply too small and insignificant to float alone in the turbulent ocean of world financial
markets, it is argued, and would be better securely linked to a bigger vessel. Many countries
contemplating this possibility see a link to the United States dollar as having huge appeal, while
in the past the German mark has also had a number of adherents. No doubt in the future the euro
will also attract its strong adherents.
In the New Zealand situation, it is not surprising that most of those who advocate New Zealand
becoming a part of a larger currency area argue for a currency union with Australia (although in
reality, given th