Are the Pacific Islands Ready for a Currency Union? An Empirical Study of Degree of Economic Convergence

Abstract

During the 2003 Annual meeting of Pacific Forum leaders from the 16 member states (14 Pacific Islands and two advanced countries in the region, namely Australia and New Zealand) held in Auckland, an idea of a single currency for the region was mooted. The single currency was indicated to be the Australia dollar. The success of any efforts for achieving such a form of integration depends on the degree of economic convergence of national economies. There are two aspects of convergence: nominal and real. They cover exchange rates, growth rates and inflation rates. Unless there is a high degree of convergence in these spheres, the costs of any premature integration could be disastrous. The objective of this paper is to investigate whether there exists any case at present for a currency union. The paper undertakes an empirical investigation, reports the results and presents some conclusions.

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