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The synchronization of business cycles in CARICOM Is there a case for a Caribbean Monetary Union?

The synchronization of business cycles in CARICOM Is there a case for a Caribbean Monetary Union? Purpose – This paper aims to assess the feasibility of the proposed Caribbean Monetary Union (CMU) by examining the synchronization of business cycles within CARICOM. According to the literature on optimum currencies, the synchronization of business cycles is a key requirement for the formation of a monetary union. Design/methodology/approach – In order to extract the business cycles we use the Hodrick‐Prescott (HP) filter and the band pass (BP) filter. For the purposes of measuring synchronization two concepts are used: the simple correlation coefficient and the Concordance statistic of Pagan and Harding. First, the feasibility of enlarging the Eastern Caribbean Currency Union is examined and then consideration is given to the formation of a new monetary union with Trinidad and Tobago as the center. Findings – The paper finds the degree of business cycle synchronization to be weak. This casts doubt on the feasibility of the proposed CMU. Research limitations/implications – This paper has placed emphasis on the synchronization of business cycles. While the synchronization of business cycles is necessary, is not sufficient for a successful monetary union. Other factors such as political cohesion may be just as important. Originality/value – This paper's main contribution is that it employs a more rigorous framework and a more comprehensive data set than previous studies. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Development Issues Emerald Publishing

The synchronization of business cycles in CARICOM Is there a case for a Caribbean Monetary Union?

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
1446-8956
DOI
10.1108/14468950810880008
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper aims to assess the feasibility of the proposed Caribbean Monetary Union (CMU) by examining the synchronization of business cycles within CARICOM. According to the literature on optimum currencies, the synchronization of business cycles is a key requirement for the formation of a monetary union. Design/methodology/approach – In order to extract the business cycles we use the Hodrick‐Prescott (HP) filter and the band pass (BP) filter. For the purposes of measuring synchronization two concepts are used: the simple correlation coefficient and the Concordance statistic of Pagan and Harding. First, the feasibility of enlarging the Eastern Caribbean Currency Union is examined and then consideration is given to the formation of a new monetary union with Trinidad and Tobago as the center. Findings – The paper finds the degree of business cycle synchronization to be weak. This casts doubt on the feasibility of the proposed CMU. Research limitations/implications – This paper has placed emphasis on the synchronization of business cycles. While the synchronization of business cycles is necessary, is not sufficient for a successful monetary union. Other factors such as political cohesion may be just as important. Originality/value – This paper's main contribution is that it employs a more rigorous framework and a more comprehensive data set than previous studies.

Journal

International Journal of Development IssuesEmerald Publishing

Published: Jun 27, 2008

Keywords: Business cycles; Caribbean; Monetary policy

References