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

Author

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  • Willie Lahari

    (Department of Economics, University of Otago)

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.

Suggested Citation

  • Willie Lahari, 2010. "Permanent and Transitory Shocks among Pacific Island Economies - Prospects for a Pacific Islands Currency Union," Working Papers 1001, University of Otago, Department of Economics, revised Feb 2010.
    • Handle: RePEc:otg:wpaper:1001
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    File URL: http://www.otago.ac.nz/economics/research/otago0771027.pdf
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    References listed on IDEAS

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    Cited by:

    1. Willie Lahari, 2011. "Exchange Rate Volatility and Choice of Anchor Currency - Prospects for a Melanesian Currency Union," Working Papers 1111, University of Otago, Department of Economics, revised Oct 2011.

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    More about this item

    Keywords

    Currency union; Gonzalo and Ng (2001) decomposition; Pacific Island countries;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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