Foreign exchange pressure in Barbados : monetary approach or monetary dependence?

This paper tests competing ideas accounting for the foreign exchange (FX) losses in Barbados in recent years. The conventional monetary and absorption approaches have motivated the explanation and policy proposals to date. However, this paper illustrates that the conventional theories fail to account for the external forces determining FX pressure. We propose a theory of monetary dependency by integrating the basic insight of the Prebisch-Singer hypothesis into an institutionally-consistent monetary framework. The model implies that the narrow policy space in the short run is overwhelmed by the falling FX supply in the long term – hence the long-term FX constraint. This constraint, moreover, prevents complete adjustment as predicted by the reflux mechanism. Although Barbados is the case study – given its recent program with the IMF – the model of monetary dependence is applicable, in general, to small very open developing countries. The econometric results indicate tenuous support for the monetarist theory, but stronger evidence in favor of the monetary dependency theory. Consistent with the prediction of latter theory, the trade-weighted American dollar exchange rate and its conditional volatility are the strongest determinants.peer-reviewe

Does the exchange rate regime influence the relationship between the output gap and the current account?

Estimates of the output gap are useful for identifying the sustainable level of noninflationary output growth in countries with a flexible exchange rate regime. For nations with a fixed exchange rate, however, domestic prices are inexorably linked to the prices of its main trading partners and are unlikely to bear little relation to the output gap. This article uses data on 45 developed and developing countries between 1970 and 2004 to show that a positive output gap in a country with a fixed exchange rate is more liable to be reflected in an imbalance on the external current account.

Financial liberalization and the stationarity of money multiplier

In countries without an explicit inflation targeting mechanism, a stable relationship between the monetary base and the money supply allows policymakers to implement changes in monetary policy with a reasonable degree of certainty about the impact on the money supply. The relationship can, however, be influenced by major structural shifts such as financial sector reforms. The present study finds that when structural change bought about by financial liberalisation is ignored, the unit root hypothesis is spuriously accepted. However, once this break is incorporated into the analysis, the multiplier exhibits no presence of a stochastic trend.Money multiplier, financial liberalisation, Caribbean,

SECTORAL OUTPUT, GROWTH AND ECONOMIC LINKAGES IN THE BARBADOS ECONOMY OVER THE PAST FIVE DECADES

Using multivariate cointegration analysis, this paper investigates the long run and short-run relationships between the agriculture, industry and service sectors for Barbados over the past five decades. Sectoral real output is analysed in two sub-periods: 1946 to 1969 and the years 1970-2003. The reason for splitting the sample is to investigate whether the commonly held view that a structural transformation from an economy dominated by agriculture to one that is predominantly service-oriented was reflected in the data. One cointegrating relationship is found in both sub-periods. The results suggest that for the earlier period, increases in industrial output (services output) were associated with lower (higher) agricultural GDP over the long run. In the short run, only changes in industrial output promoted growth in agricultural output. In the latter period, an expansion in services output was found to be the only determinant of industrial output in both the short and long run, as agricultural output did not appear to have any statistically significant impact in either timeframe.Economic linkages, Structural change, Growth, Sectoral output