Monetary Policy in a Heterogeneous Union: The Australian Experience

The geological and climatic conditions of the Australian continent have made Australia a heterogeneous monetary union. Manufacturing and service industries are located in the population centers in the temperate southeast, and mining and pastoral activities take place in the vast expanses of the interior and north. In a small open economy with easy access to international capital markets, monetary policy is transmitted through the exchange rate. Monetary policy affects the interior and north more strongly than the southeastern seaboard because primary goods are mainly exported, whereas services and manufactures are mostly consumed domestically. As a consequence, the Reserve Bank of Australia must reconcile the economic interests of the interior and north and the southeastern seaboard.