Trinity Strikes Back: Monetary Independence and Inflation in the Caribbean

Author/Editor:

Serhan Cevik ; Tianle Zhu

Publication Date:

September 20, 2019

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Monetary independence is at the core of the macroeconomic policy trilemma stating that an independent monetary policy, a fixed exchange rate and free movement of capital cannot exist at the same time. This study examines the relationship between monetary autonomy and inflation dynamics in a panel of Caribbean countries over the period 1980–2017. The empirical results show that monetary independence is a significant factor in determining inflation, even after controlling for macroeconomic developments. In other words, greater monetary policy independence, measured as a country’s ability to conduct its own monetary policy for domestic purposes independent of external monetary influences, leads to lower consumer price inflation. This relationship—robust to alternative specifications and estimation methodologies—has clear policy implications, especially for countries that maintain pegged exchange rates relative to the U.S. dollar with a critical bearing on monetary autonomy.

Series:

Working Paper No. 19/197

Subject:

English

Publication Date:

September 20, 2019

ISBN/ISSN:

9781513511702/1018-5941

Stock No:

WPIEA2019197

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

19

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