Abstract
There has been a high degree of economic and financial integration between Australia and New Zealand with free trade agreements linking the capital and labor markets. Given a strong economic relationship, business-cycle transmission is expected to exist between the two countries. By analyzing the shock-transmission channels via trade, monetary policy, and exchange rates between Australia and New Zealand we can infer that if Australia and New Zealand trade less, have more similar monetary policy structure, or have less similar economic structures they would have stronger economy correlation. The results also show that the highly integrated banking system between Australia and New Zealand is an additional avenue for shock transmission between both countries.
Highlights
Business-cycle synchronization across two economies might be caused by the endogenous shock transmission between the two countries or by common exogenous influences
This study examines how Australian shocks propagate to the New Zealand economy through bilateral trade, exchange rate passthrough phenomenon, and monetary policy and provides policy implication for the two economies
The estimated coefficient of LYA in equation (5) represents the long run elasticity of income transmission, which indicates that a one percent change in Australian Gross Domestic Product (GDP) would cause New Zealand GDP to change by 0.52 percent change
Summary
Business-cycle synchronization across two economies might be caused by the endogenous shock transmission between the two countries or by common exogenous influences. The economic prosperity from 1960 through 1973 in Japan caused the mineral boom during the same period in Australia, because Japan needed the agricultural goods and mineral resources imported from Australia to accommodate this expansion[39]. This is an example of endogenous shock transmission that results in synchronization across economies. Australia and New Zealand are interdependent on each other and share many economic and financial similarities. There has been a high degree of economic integration between Australia and New Zealand via free trade agreements including linked capital and labor markets.
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