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Is the Caribbean Community an Optimum Currency Area?

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  • Ghartey, E.E.

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    Abstract

    This study analyzes the viability of the Caribbean Market Economies (CME) as an optimum currency area. A vector error correction model is used with cointegration as an identifying restriction to decompose real output, prices and exchange rate into supply, demand and monetary shocks. Respective shocks are then tested for symmetry between countries to assess their suitability in meeting the optimum currency area (OCA) criteria. The US is used to capture global effects in assessing the convergence of the optimum OCA criteria. It is then used as a yardstick to compare size of shocks and speed of adjustment to those shocks to determine the viability of the CME as an optimum currency area. Shocking results from impulse response functions show that the Eastern Caribbean Currency Area (ECCA) members meet the OCA convergence criteria better than the non-ECCA members. However, the overall results depict that the Caribbean Community are not a suitable OCA as some of their correlation results are asymmetrical, and have large size of shocks and slow speed of adjustment relative to the US.

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    Bibliographic Info

    Article provided by Euro-American Association of Economic Development in its journal Estudios Economicos de Desarrollo Internacional.

    Volume (Year): 8 (2008)
    Issue (Month): 1 ()
    Pages: 5-36

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    Handle: RePEc:eaa:eedein:v:8:y2008:i:8_1

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    Related research

    Keywords: Vector error correction model; shocks; symmetry; optimum currency area; Caribbean Market Economy;

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    References

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    1. Gamber, Edward N & Joutz, Frederick L, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(5), pages 1387-93, December.
    2. Bean, Charles R, 1992. "Economic and Monetary Union in Europe," CEPR Discussion Papers 722, C.E.P.R. Discussion Papers.
    3. George S. Tavlas, 2009. "Optimum-Currency-Area Paradoxes," Review of International Economics, Wiley Blackwell, vol. 17(3), pages 536-551, 08.
    4. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers 643, C.E.P.R. Discussion Papers.
    5. Summary, Rebecca M, 1989. "A Political-Economic Model of U.S. Bilateral Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 179-82, February.
    6. Fleming, J Marcus, 1971. "On Exchange Rate Unification," Economic Journal, Royal Economic Society, vol. 81(323), pages 467-88, September.
    7. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-52, June.
    8. Maria Demertzis & Andrew Hallett & Ole Rummel, 2000. "Is the European union a natural currency area, or is it held together by policy makers?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(4), pages 657-679, December.
    9. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of Monetary Unification," Department of Economics, Working Paper Series qt791143kp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    10. Herbert G. Grubel, 1970. "The Theory of Optimum Currency Areas," Canadian Journal of Economics, Canadian Economics Association, vol. 3(2), pages 318-24, May.
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