Should Pacific Island nations adopt the Australian dollar?

Abstract

Conclusion: The Pacific Island nations are small undiversified economies vulnerable to a range of shocks — weather and crop failures, changes in foreign demand, and domestic political uncertainty or turmoil — and they trade with a limited, concentrated set of countries. While they have adopted a range of exchange rate regimes, it is an arguable proposition that countries with these characteristics should use the currency of another, bigger country, such as Australia, rather than their own. Adopting the Australian dollar would provide a number of advantages in dealing with the vulnerabilities to which these nations’ economies are exposed. Not only would it reduce the administrative burden in these countries, but it would reduce the impact of political disturbances on their economies, eliminate the difficult task of managing liquidity in their foreign exchange markets, and stabilise the exchange rate with their most important trading partner. The Australian dollar is the most sensible candidate to replace national currencies, given the trade and economic linkages between these countries and Australia, the market size and stabilising properties of the Australian dollar, and the solid performance of Australian monetary policy over the past decade.