This paper aims to assess the feasibility of the proposed Caribbean Monetary Union (CMU) by examining the synchronization of business cycles within CARICOM. According to the literature on optimum currencies, the synchronization of business cycles is a key requirement for the formation of a monetary union.
In order to extract the business cycles we use the Hodrick‐Prescott (HP) filter and the band pass (BP) filter. For the purposes of measuring synchronization two concepts are used: the simple correlation coefficient and the Concordance statistic of Pagan and Harding. First, the feasibility of enlarging the Eastern Caribbean Currency Union is examined and then consideration is given to the formation of a new monetary union with Trinidad and Tobago as the center.
The paper finds the degree of business cycle synchronization to be weak. This casts doubt on the feasibility of the proposed CMU.
This paper has placed emphasis on the synchronization of business cycles. While the synchronization of business cycles is necessary, is not sufficient for a successful monetary union. Other factors such as political cohesion may be just as important.
This paper's main contribution is that it employs a more rigorous framework and a more comprehensive data set than previous studies.
