Is the Caribbean Community an Optimum Currency Area?
AbstractThis 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 InfoArticle provided by Euro-American Association of Economic Development in its journal Estudios Economicos de Desarrollo Internacional.
Volume (Year): 8 (2008)
Issue (Month): 1 ()
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Web page: http://www.usc.es/economet/eaa.htm
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- F15 - International Economics - - Trade - - - Economic Integration
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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