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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. |