Monetary Stability in Economic Development

Abstract

This paper addresses four issues. The first is the identification of the regimes amongst which a choice can sensibly be made. The second is whether the use of an external currency would create a ‘currency area’ that would be more helpful to economic development than monetary independence. The third is whether, if monetary independence were likely to be optimal in theory, it would be superior in practice to integration into an external currency area, given the likely qualities of monetary policy at home and in the best alternative monetary area. The three issues are interrelated. This paper supplements recent work by Duncan (2005). It supports Duncan’s conclusion, that the South Pacific economies would provide themselves with a firmer monetary base for economic development if they were anchored firmly to an external currency. It provides some additional information and analysis that strengthens the case beyond that made by Duncan, arguing for a single or series of South Pacific currency boards linked to the Australian dollar or, better still, for all of the countries concerned, but more difficult to achieve, to a new currency formed through monetary union between Australia and New Zealand.