Working Papers

The currencies of Caribbean countries have now outlived their usefulness, and have become a liability. They were devised at a time when most payments were made using notes and coin, issued in distant metropolitan centres. Scarcity of the means of payment was a severe hindrance to commerce. In response Currency Boards were set up, to issue local currency as needed in the colonies. The system worked well because the local currency issue was backed by an equivalent value of Sterling, in a global system of fixed exchange rates. In contrast, nowadays payments are made mostly by electronic communication, credit and debit cards, cheques and drafts, with settlement over digitized bank accounts. In today’s world an own currency has become a liability for small economies, limiting access to international goods and services, exposing residents to risks of currency devaluation and inflation, eroding the value of domestic savings, increasing economic inequalities, providing a tool for unproductive government spending, and diverting attention from the need to increase productivity and enhance international competitiveness. You can also access this publication on The Social Sciences Research Network.

This paper proposes an approach to macroeconomic policy which equips the authorities in small, open, financially-integrated economies (SOFIEs)2 to target the exchange rate by influencing the volumes of trade in goods and services to achieve equilibrium at the target rate. This is achieved by the use of fiscal policy: the authorities may adjust the size of the fiscal deficit and how it is financed to contain the level of aggregate expenditure in the economy, and the demand for imports that flows from that expenditure.