Assessing Exchange Rate Competitiveness in the Eastern Caribbean Currency Union

43 Pages Posted: 28 Apr 2009

See all articles by Emilio Pineda

Emilio Pineda

International Monetary Fund (IMF)

Paul Anthony Cashin

International Monetary Fund (IMF)

Yan Sun

International Monetary Fund (IMF)

Date Written: April 2009

Abstract

This paper uses three methods to assess movements of real exchange rates in the ECCU over time. First, the purchasing power parity hypothesis is tested and then used to provide a benchmark for equilibrium real exchange rates in the region. Second, a fundamentals-based equilibrium real exchange rate approach is used to explore sources of real exchange rate fluctuations in ECCU countries. And third, a macroeconomic balance approach is used to estimate equilibrium current account or current account "norms". The main finding of these analyses is that there is little evidence of overvaluation of the EC dollar. Furthermore, this paper contributes to the literature by analyzing the distinctive impact of tourism in determining real exchange rates through the wealth effect induced by tourism-driven increases in terms of trade and productivity.

Keywords: Exchange rates, Eastern Caribbean Currency Union, Real effective exchange rates, Purchasing power parity, Tourism, Competition, Economic models

Suggested Citation

Pineda, Emilio and Cashin, Paul Anthony and Sun, Yan, Assessing Exchange Rate Competitiveness in the Eastern Caribbean Currency Union (April 2009). IMF Working Paper No. 09/78, Available at SSRN: https://ssrn.com/abstract=1394778

Emilio Pineda (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Paul Anthony Cashin

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Yan Sun

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States