to be carefully assessed, and i believe it is appropriate for me to comment on those. one other point should be clarified at the outset. there are some differences between “ currency union ” ( implying a new central bank and a new currency to cover a range of countries and currencies, as in the case of the european monetary union ) and “ dollarisation ” ( implying the simple adoption of the currency of another country, whether in new zealand ’ s case that be the australian dollar or the united states dollar ). and the most important of those differences for us is whether new zealand would have any part in making the decisions about the monetary policy which would affect us. in a currency union, all the countries included in the union in principle have a say in forming monetary policy for the area covered by the union. all countries have a voice at the table, even if that is only a single voice among many. in the case of dollarisation, however, only the country whose currency is adopted makes the decisions about monetary policy. the study by sir frank holmes and arthur grimes suggested that a currency union with australia ( involving a new central bank for both countries, and a new currency ) could have some useful benefits for new zealand. and they suggested a currency union, rather than new zealand ’ s adoption of the australian dollar, largely for reasons of political acceptability in new zealand. whether such an approach would meet the political acceptability test in australia, of course, is a bit debatable. preliminary comments from australia suggest no interest whatsoever in abandoning the australian dollar in favour of a new trans - tasman currency. but whether currency union with australia, or the simple adoption of the australian dollar by new zealand, the outcome would in substance be very similar. with the exception of who gets the seigniorage income, on which i will comment in a moment, both options would involve new zealand ’ s relinquishing any effective control over monetary policy in new zealand. in the case of the united states dollar, currency union is not even being raised as a possible option. the only possibility in that case would involve new zealand ’ s adopting the united states dollar. and that too, of course, would mean relinquishing any control over our own monetary policy. since the term “ currency union ” has been widely used in new zealand to include both currency union as properly understood and the simple process of adopting another country ’ s currency, i will for the most part use the term “

in favour of lower taxation they would also register a strongly favourable reaction. the real question is not whether less currency uncertainty would be helpful but whether less currency uncertainty would compensate for the costs of a currency union, such as the risks of greater variability in output and domestic inflation. and the answer to that question is much less clear. to illustrate, let ’ s suppose there is a sharp fall in new zealand export prices. with our own currency, this is quite likely to lead to a fall in the new zealand dollar, as it did in the second half of 1997 and murray, john ( 1999 ), “ why canada needs a flexible exchange rate ”, bank of canada working paper 99 - 12. 1998. this fall in the currency cushions new zealand exporters to some extent from the adverse impact of the fall in world commodity prices, effectively by spreading the “ pain ” of that fall across the rest of us, who find that our new zealand dollars can now buy fewer imports than before. without our own currency, on the other hand, there is an increased risk that a fall in new zealand export prices leads to no fall in our ( new ) currency, our exporters have to suffer the full pain of the fall in international prices, and may well be forced to lay off staff and reduce output. that has an indirect effect, of course, on the rest of the country, but those who are not closely associated with the export industries may be relatively little affected. in the final analysis, the choice of exchange rate regime is mainly a choice about the nature of the pain we prefer to experience as a consequence of international shocks. it does not provide an opportunity to escape the pain inevitably caused by those shocks. conclusion it would be nice to conclude my comments today with a clear conclusion, or an on - balance judgement. i don ’ t propose to do that, partly because the decision about currency regime is, as i have indicated, finally a matter for elected politicians not for central bankers, and partly because even the economic pros and cons do not point to a clear conclusion. moreover, it may well be appropriate to widen the range of options somewhat, and to think more laterally before we reach any conclusions at all. for example, might it be possible to negotiate a comprehensive free trade agreement with the united states as part of a package involving our adoption of the us dollar and surrender of the relevant seigniorage income? losing the seigniorage income might well be a worthwhile concession