Monetary policy in a heterogeneous monetary union: the Australian experience

Australia is a monetary union with strong regional specialization. Manufacturing and service industries are located in the population centres on the south-eastern seaboard, and mining and pastoral activities take place in the interior and north of the continent. Monetary policy affects the interior and north more strongly than the south-eastern seaboard because Australian primary goods are mostly exported and the exchange rate provides the main transmission channel for monetary policy. The Reserve Bank of Australia must consider the economic interests of the interior and north and the south-eastern seaboard. Since monetary policy cannot differentiate between regions, there is a need for interregional macroeconomic risk-sharing.