Estimation of equilibrium real exchange rates for the Eastern Caribbean Central Bank unified currency Area

Author(s): Williams, Oral H; Darius, Reginald; Anthony, Myrvin (1999)

Created 22 Jul, 1999
Categories Working Papers
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This paper examines the behaviour of the real effective exchange rate (REER) of the Eastern Caribbean Central Bank monetary union. Using a Generalised Method of Moments estimator, the results suggest the existence of considerable inertia in the adjustment of the REER. Plausible factors for this inertia include the existence of tax, price and wage distortions in the economies. The terms of trade, openness, government consumption and trade taxes were economic fundamentals that were significant explanatory variables. Despite the existence of apparent misalignment of the REER, the longevity of the fixed exchange rate regime may hinge on the political consensus of commitment, fiscal discipline imposed by the monetary arrangement and the degree of foreign asset cover maintained by the banking system.

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