Purchasing Power Parity in the Eastern Caribbean Currency Union

There is increasing interest in regional trade, investment, and currency blocs, and in the optimal public policies for such blocs. There is also much managerial interest in the co-movement of exchange rates in a region. The Eastern Caribbean Currency Bloc is one of only three (and one of the longer lasting) multi-country common central banks in the world and is the only such bank in which member countries pool all their foreign reserves. While it is an important economic region especially for the United States, most studies of regional exchange rate relationships have not examined the nature of Caribbean exchange rates. This paper documents for the first time that purchasing power parity holds for each exchange rate and many real exchange rates are cointegrated and move in a bloc in the Eastern Caribbean region over the 1980s and 1990s.