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

Author

Listed:
  • 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.

Suggested Citation

  • Craigwell, Roland & Greenidge, Kevin & Maynard, Tracy, 2009. "Exchange rate regimes and monetary autonomy: Empirical evidence from selected Caribbean countries," MPRA Paper 33437, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:33437
    as

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    File URL: https://mpra.ub.uni-muenchen.de/33437/1/MPRA_paper_33437.pdf
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    References listed on IDEAS

    as
    1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    2. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    3. Thomas Philippon & Jeronimo Zettelmeyer & Eduardo Borensztein, 2001. "Monetary Independence in Emerging Markets; Does the Exchange Rate Regime Make a Difference?," IMF Working Papers 01/1, International Monetary Fund.
    4. Frankel, Jeffrey & Schmukler, Sergio L. & Serven, Luis, 2004. "Global transmission of interest rates: monetary independence and currency regime," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 701-733, September.
    5. 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.
    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. Lanne, Markku & Lütkepohl, Helmut & Saikkonen, Pentti, 1999. "Comparison of unit root tests for time series with level shifts," SFB 373 Discussion Papers 1999,88, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    8. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Exchange rates; Monetary policy; Error correcting mechanisms;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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