Trinity Strikes Back: Monetary Independence and Inflation in the Caribbean

September 20, 2019

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Format: Chicago

Serhan Cevik, and Tianle Zhu. Trinity Strikes Back: Monetary Independence and Inflation in the Caribbean, (USA: International Monetary Fund, 2019) accessed November 21, 2024

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.

Subject: Central bank autonomy, Central banks, Conventional peg, Exchange rate arrangements, Foreign exchange, Inflation, Monetary policy, Monetary policy frameworks, Prices

Keywords: Caribbean, Central bank autonomy, Consumer price inflation, Conventional peg, Country, Dynamics in a group, Exchange rate arrangements, Exchange rate fexibility, GMM estimation, Independence, Inflation, Inflation aversion, Inflation dynamics, Inflation in the Caribbean, Macroeconomic trilemma, Monetary independence, Monetary policy autonomy, Monetary policy frameworks, System GMM identification assumption, WP

Publication Details

Pages:

19
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/197
Stock No:

WPIEA2019197
ISBN:

9781513511702
ISSN:

1018-5941

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