A Currency Union for the Caribbean

Abstract

The experiences of Caribbean Economic Community countries show that exchange rate depreciation in these countries is inflationary, and that, while changes in the relative prices of tradables may affect exports, tourism, and imports, nominal exchange rate changes have no predictable effect on those relative prices. Under these circumstances, economic literature indicates that a fixed exchange rate regime is optimal, and Caribbean countries with (quasi-) currency boards have been successful in maintaining durable exchange rate pegs. Commitment to a currency board is a potentialJy vital step in achieving a currency union for the Caribbean.

Dual nominal anchors in the Caribbean

“…It is well established that several Caribbean economies have successfully maintained fixed exchange rate regimes since the 1970s (see for instance Worrell, 2003). Our study finds that three of these economies – Barbados and Belize and to a lesser extent the Bahamas – were engaged in active sterilization over the review period.…”

“…Moreover, Guyana, Jamaica and Trinidad and Tobago are often seen in the Caribbean as economies with managed floats (Worrell, 2003). In addition, Worrell acknowledges that Trinidad and Tobago provides the Caribbean's example of the phenomenon known as “fear of floating”.…”

What Do Demand and Supply Shocks Say About Caribbean Monetary Integration?

“…To date, there has been a dearth of work on the proposed CMU, and much emphasis has been placed on how the region measures up in terms of the OCA criteria (see Anthony and Hallet ; Worrell ; Baladi ; Jayaraman ). The general consensus is that the countries of the proposed CMU do not constitute an OCA.…”

Introduction

“…In the Middle East, the six member states of the Gulf Cooperation Council have laid out a path to a monetary union, which was originally scheduled for 2010 (Sturm and Siegfried, 2005;Al-Mansouri and Dziobek, 2006;IMF, 2008;Buiter, 2008;Khan, 2009). 9 Proposals for monetary union also exist for the Caribbean (Worrell, 2003) and in Oceania where six Pacifi c Islands are considering forming a monetary union (Browne and Orsmond, 2006). Last but not least, plans for regional monetary integration are frequently raised (and dismissed) also for the Mercado Común del Cono Sur (MERCOSUR) (Eichengreen, 1998;Fratianni and Hauskrecht, 2002;De Carvalho, 2006;Nitsch, 2006) and the North American Free Trade Agreement (NAFTA) (Buiter, 1999;Helleiner, 2006).…”