This paper assesses the extent of regional financial integration in the Caribbean Community (CARICOM) by analyzing equity prices in the region and rigidity of external financing constraints. The results are presented in a cross-regional perspective. The Caribbean stock markets are not as well integrated as one would expect from the extent of cross-listing and importance of regional banking groups: price differentials of cross-listed stocks reach an average of 5 percent. Auto-Regressive models suggest that these price differentials are only slowly arbitraged away, with half-lives exceeding 7 worked days, even when looking only at large arbitrage opportunities (using a Threshold Auto-Regressive model). A speculative methodology using macroeconomic data seems to confirm these findings. A strong mean reversion of the current account (respectively regional trade imbalances) is interpreted, following Obstfeld and Taylor (2004), as a lack of ways to finance current account deficits, i.e. a lack of global (respectively regional) financial integration. The region appears to be much less integrated than the EU15 or the ASEAN+3 groups, although it fares well compared to other LDCs.
The experiences of Caribbean Economic Community countries show that exchange rate depreciation in these countries is inflationary, and that, while changes in the relative prices of tradables may affect exports, tourism, and imports, nominal exchange rate changes have no predictable effect on those relative prices. Under these circumstances, economic literature indicates that a fixed exchange rate regime is optimal, and Caribbean countries with (quasi-) currency boards have been successful in maintaining durable exchange rate pegs. Commitment to a currency board is a potentially vital step in achieving a currency union for the Caribbean.
where ca * i is the trade balance, as a share of GDP, of country i with respect to the CARICOMgroup, computed by summing relevant bilateral imports and exports.
The MGE estimates an average β of −0.34, lower than the beta found for global integration. This is reminiscent to results such as the ones in Bayoumi and Rose (1993) who showed that the slope parameter, in a Feldstein-Horioka estimation of
At the beginning of the 1960s the countries that now constitute the Caricomgroup all had stable currencies, managed, in the case of English-speaking countries, by currency boards, and denominated in sterling. The British Caribbean Currency Board (BCCB), headquartered in Port of Spain, Trinidad, issued a currency which circulated from British Guiana (now Guyana) in the south through the eastern Caribbean to St. Kitts, Nevis, and Anguilla in the north. The Jamaican currency board issued a currency which also circulated in the Cayman Islands, and there were separate