Economic resilience with an exchange rate peg: The Barbados experience, 1985-1999

Author(s): Worrell, DeLisle; Codrington, Harold; Craigwell, Roland; Greenidge, Kevin (2000)

Created 22 Jul, 2000
Categories Working Papers Roland Craigwell Special Collection
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Throughout the entire period of international financial instability, beginning with the end of the Bretton Woods arrangements in the 1970s, and continuing through periods of commodity price instability, international debt crisis and a series of international financial crises, a few small island economies of the Caribbean have maintained fixed exchange rate regimes and achieved substantial real economic growth with low inflation and an absence of chronic balance of payments difficulties. Countries in this group include Aruba, the Bahamas, Barbados, Belize, the Netherlands Antilles and the countries of the Organisation of Eastern Caribbean States (OECS). These countries’ experience contrasts with that of their neighbors – the Dominican Republic, Haiti, Guyana, Jamaica and Suriname - where the record is more typical of emerging economies; repeated or chronic balance of payments crises, bouts of inflation and a series of exchange rate crises. The experience of countries which have sustained an exchange rate peg is helpful in addressing this dilemma. The most promising institutional arrangements experimented with in the past decade are inflation targeting (for countries with flexible exchange rates) and currency boards and monetary unions (as a way of anchoring the exchange rate). The Caribbean offers another example, based on the Barbados experience, of an institutional arrangement which suits the circumstances of open economies because it permits the use of fiscal policy to sustain the exchange rate anchor, using a forecasting framework that targets the level of foreign exchange reserves. This framework was employed successfully in implementing an adjustment strategy which minimized the costs of adjusting to a major balance of payments crisis in 1991/92. In the next section of the paper we set out the conceptual framework which provided the underpinnings for the formulation of fiscal and monetary policy in Barbados during the period 1985-1998, the period during which the arrangements described in the paper came to maturity. The third section describes the institutional framework. A key component of the process was the forecast model. The fourth section discusses the model, its theoretical basis, how it evolved, its current structure, the behavioural relationships embodied in it, how it is used in practice and its forecast performance. The fifth section describes the processes of policy decision and monitoring of economic performance. We end with an assessment of the strengths and weaknesses of the arrangement.

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