Permanent and Transitory Shocks among Pacific Island Economies - Prospects for a Pacific Islands Currency Union

Willie Lahari ()
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Willie Lahari: Department of Economics, University of Otago

No 1001, Working Papers from University of Otago, Department of Economics

Abstract: This paper re-kindles the debate on the feasibility of a Pacific Islands currency union in view of the recent expansion and consolidation of regional strategies and agreements such as the ÔPacific PlanÕ and the Pacific Agreement on Closer Economic Relations Plus. These initiatives, including past efforts, have given limited consideration to the subject for a Pacific Islands currency union. This study exploits the optimal currency area theoretical framework and employs the Gonzalo and Ng (2001) decomposition method. This is the first time this method is used in the analysis relating to currency or monetary unions. Newly-constructed quarterly time series data are also applied. This paper investigates the dynamic effects of permanent and transitory shocks on key macroeconomic variables among Pacific Island countries (PICs). Evidence shows that the proposed union of six PICs (Fiji, PNG, Samoa, Solomon Islands, Vanuatu and Tonga) do not meet most of the preconditions for a union. However, further investigation shows evidence for the Melanesian countries (Fiji, PNG, Solomon Islands and Vanuatu) to possibly form a monetary union, preferably with the Australian dollar as the anchor currency. Nonetheless, further costs in terms of the alignment of policies by Melanesian countries are required.

Keywords: Currency union; Gonzalo and Ng (2001) decomposition; Pacific Island countries (search for similar items in EconPapers)
JEL-codes: C3 C5 E3 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2010-02, Revised 2010-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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