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Price Dynamics in the Eastern Caribbean

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  • Rupa Duttagupta
  • Yan Sun
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    Abstract

    The Eastern Caribbean Currency Union (ECCU) countries share a common currency, the EC dollar, which has been pegged to the U.S. dollar at the same rate for more than three decades. This paper examines the influence of the peg on ECCU price stability, and analyzes whether absolute Purchasing Power Parity (PPP) holds within the currency union. It shows that U.S. price stability has helped anchor price movement in the ECCU. As the same time, inflation in the ECCU is not entirely imported from the U.S., and has some domestic policy content. In addition, deviation from PPP within the ECCU can be attributed to persistent price dispersion of nontradables.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/90.

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    Length: 21
    Date of creation: 01 Apr 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/90

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    Related research

    Keywords: Purchasing power parity; Eastern Caribbean Currency Union; Currency pegs; Price stabilization; Real effective exchange rates; Economic models; inflation; exchange rate; real exchange rates; real exchange rate; relative prices; relative price; price level; exchange rate stability; real exchange rate stability; exchange rates; nominal exchange rate; price stability; inflation dynamics; exchange rate fluctuations; exchange rate arrangement; rate of inflation; relative price variability; monetary economics; effective exchange rates; fixed exchange rate; monetary aggregate; bilateral real exchange rate; exchange rate volatility; currency unions; real exchange rate movements; bilateral exchange rates; aggregate demand; exchange rate movements; exchange rate variation; inflation rates; exchange rate regime; exchange rate variability;

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    1. P. Dorian Owen, 2003. "General-to-Specific Modelling Using PcGets," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 609-628, 09.
    2. Parsley, David C & Wei, Shang-Jin, 1996. "Convergence to the Law of One Price without Trade Barriers or Currency Fluctuations," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1211-36, November.
    3. Charles Engel & John H. Rogers, 1999. "Violating the Law of One Price: Should We Make a Federal Case Out of It?," NBER Working Papers 7242, National Bureau of Economic Research, Inc.
    4. Charles Engel, 1992. "Real Exchange Rates and Relative Prices: An Empirical Investigation," NBER Working Papers 4231, National Bureau of Economic Research, Inc.
    5. Sarno, Lucio & Taylor, Mark P, 2001. "Purchasing Power Parity and the Real Exchange Rate," CEPR Discussion Papers 2913, C.E.P.R. Discussion Papers.
    6. Rogers, John H., 2007. "Monetary union, price level convergence, and inflation: How close is Europe to the USA?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 785-796, April.
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