Fix or Float?

It's been mentioned again, should New Zealand's exchange rate be fixed or float as it does now? Comparison has been made with Singapore. There is no doubt that Singapore has done an excellent job, Lee Kuan Yew is one of the great men of the modern age. But whether New Zealand should copy Singapore is open to debate. The NZ Treasury discuss this here: http://www.treasury.govt.nz/publications/research-policy/wp/2011/11-01/10.htm

Those with a long memory will remember NZ had the crawling peg model, which sounds similar to Singapore's basket of currencies.

But what about fixing? For me the advantage of fixing the exchange rate is it provides certainty. Businesses can plan effectively. The problem NZ has, and this has been the case since it floated its currency, is the exchange rate is volatile and the Kiwi dollar is often grossly overvalued. A consistently overvalued currency hurts exporters and leads to cheap imports which hurt local manufacturers producing for the domestic market. Fixing the exchange rate and linking its value to infrastructure spend, or possibly a balance of gold and silver prices, infrastructure and the five major currencies (US, Euro, Yen, Sterling and Swiss Franc) provides certainty, industry can forecast.

Doing a rough back of the envelope calculation; the NZ Dollar should be worth about US$0.62, but today it's quoted at US$0.69; more than 10% overvalued in other words. That's my point, this pattern of overvaluing seriously undermines economic potential, stifling local production and exporters.