What Do Demand and Supply Shocks Say About Caribbean Monetary Integration?

• DOI: http://doi.org/10.1111/twec.12393
• Author: Samuel Braithwaite
• Published date: 01 May 2017
• Date: 01 May 2017

What Do Demand and Supply Shocks Say

About Caribbean Monetary Integration?

Samuel Braithwaite

The University of the West Indies, Mona, Jamaica

1. INTRODUCTION

WITH the demise of colonial rule and the globalisation of the world economy post-

Second World War, many groups of countries embarked on integration projects. In

the late 1980s, the intellectual and political leadership of the Caribbean Community

(CARICOM) felt that it was time to the regional integration movement, which was fast

approaching its 20 year milesto ne. While cooperation in CARICOM had gone beyond the

typical customs union arrangement and provided regional cooperation in areas such as

tourism, education and sport, there was much room for further integration. Undoubtedly,

the European Union’s (EU) move towards monetary integration influenced the aspirations

of CARICOM. The main aspect, and indeed the most difficult and symbolic part of the

deepening process, is the proposed creation of a Caribbean Monetary Union (CMU). From

all indications, the title of ‘Caribbean Monetary Union’ has not been officially adopted as

the name for this stage of the Caribbean integration process.

Among the twelve countries which constitute the proposed CMU, six are part of the East-

ern Caribbean Currency Union (ECCU), whose monetary unit the Eastern Caribbean Dollar

(EC Dollar) has been in existence since 1965. The EC Dollar is the successor to the British

West Indian Dollar and has been pegged to the US Dollar since 1976. While the ECCU is far

from perfect (e.g. high unsustainable public debt) its survival is noteworthy. The EC Dollar

serves six of the twelve potential CMU countries: Antigua and Barbuda, Dominica, Grenada,

St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. They are served by a com-

mon central bank, the Eastern Caribbean Central Bank (ECCB).

Given the loss of monetary sovereignty for members of a currency union, similar business

cycles make for easier ‘regional’ policy, as suggested by optimum currency area (OCA) the-

ory. This study primarily seeks to examine the correlation of demand and supply shocks

among the proposed members of a CMU, that is the ECCU six plus, Barbados, Belize,

Guyana, Jamaica, Suriname and Trinidad. The Bahamas (a CARICOM member) and the Uni-

ted States are added to complement the analysis. The overarching question is whether or not

there is economic support, based on the methodology employed, for the formation of a mone-

tary union? Given the longevity of the ECCU, this study, as a secondary purpose, examines

the correlation of shocks within the ECCU. The ECCU countries have been used as a bench-

mark for comparisons with the rest of the region on the issue of monetary integration, and

while there is nothing fundamentally wrong with this approach, it begs the question as to how

‘similar’ are the members of the ECCU.

The demand and supply shocks of the countries studied are analysed using the long-run

vector autoregression approach. The shocks are ‘extracted’, and the correlation of the shocks

An earlier version of this paper forms part of my PhD Thesis. I am entirely grateful to my supervisors

and fellow graduate students at Temple University for their guidance and comments. All errors remain

my own.

©2016 John Wiley & Sons Ltd 949

The World Economy (2017)

doi: 10.1111/twec.12393

The World Economy