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Exchange rate regimes and monetary autonomy: Empirical evidence from selected Caribbean countries

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  • Craigwell, Roland
  • Greenidge, Kevin
  • Maynard, Tracy

Abstract

This paper uses the error correcting methodology to investigate how pegged and non-pegged exchange rate regimes in a set of Caribbean countries affect the closeness of the relationship between changes in a base country rate and the local rate. This interest rate parity condition is subjected to effects arising from capital controls and common shocks related to inflation and external debt. The results support the standard theory that peg countries (like Barbados) follow the base country interest rate more closely than the managed float or flexible rate economies (such as Trinidad and Tobago and Jamaica). In addition, the paper supports the open economy macroeconomic policy trilemma proposition that only two of the following goals – stability in the exchange rate, national independence in monetary policy and free capital mobility- can be achieved simultaneously.

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File URL: http://mpra.ub.uni-muenchen.de/33437/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33437.

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Date of creation: 2009
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Publication status: Published in Central Bank of Barbados Economic Review 2.36(2009): pp. 22-36
Handle: RePEc:pra:mprapa:33437

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Related research

Keywords: Exchange rates; Monetary policy; Error correcting mechanisms;

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  1. Jeffrey A. Frankel & Sergio L. Schmukler & Luis Serven, 2002. "Global Transmission of Interest Rates: Monetary Independence and Currency Regime," NBER Working Papers 8828, National Bureau of Economic Research, Inc.
  2. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  3. Forssbaeck, Jens & Oxelheim, Lars, 2005. "On the Link between Exchange-Rate Regimes and Monetary-Policy Autonomy: The European Experience," Working Paper Series 637, Research Institute of Industrial Economics.
  4. Thomas Philippon & Jeromin Zettelmeyer & Eduardo Borensztein, 2001. "Monetary Independence in Emerging Markets," IMF Working Papers 01/1, International Monetary Fund.
  5. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  6. Bailliu, Jeannine & Lafrance, Robert & Perrault, Jean-Francois, 2003. "Does Exchange Rate Policy Matter for Growth?," International Finance, Wiley Blackwell, vol. 6(3), pages 381-414, Winter.
  7. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 300-351, February.
  8. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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