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Price Dynamics in the Eastern Caribbean

Rupa Duttagupta and Yan Sun

No 08/90, IMF Working Papers from International Monetary Fund

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.

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 (search for similar items in EconPapers)
Date: 2008-04-01
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Handle: RePEc:imf:imfwpa:08/90