Exchange rate regimes and economic performance in the Caribbean

Author(s): Rajapatirana, Sarath; Seerattan, Dave (2000)

Created 22 Jul, 2000
Categories Working Papers
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The issue of how to structure an appropriate exchange rate regime for countries has for a long time occupied the attention of economists. The recent international financial problems have only served to intensify this debate. In spite of the amount of research into this issue, however, there is little consensus on the link between the choice of monetary regimes and economic performance. There are many reasons for this; at a theoretical level, it is difficult to delineate a clear relationship between the monetary regime and various economic performance measures because of the indeterminate nature of the causal relationship between the monetary regime and macroeconomic variables. For example, fixed exchange rate regimes are thought to have a positive impact on trade and output because it reduces exchange rate uncertainty. On the other hand it can also reduce trade and output by restricting relative price adjustments. Another reason for the difficulty of determining a clear and unambiguous relationship between the monetary regime and economic performance is the problem of trying to distinguish between the impact of the monetary regime on economic performance from other factors impacting on economic performance. Further empirical research on these issues seems, therefore, to be the only way of resolving the policy dilemma of determining which monetary regime is most appropriate, especially in small open economies. To this end, this paper attempts to provide some empirical answers to questions surrounding the link between the exchange rate regime and economic performance in CARICOM countries and by extension, to help clear up some ambiguities and differences of opinion that still surrounds the issue of different exchange rate regimes in the Caribbean.

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