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Mr. Serhan Cevik and Tianle Zhu
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.
Jang-Yung Lee

even before the capital account liberalization. The sample period of the tests covers only up to 1992 and thus misses a significant portion of the recent inflow episodes. 83/ As possible explanations of the findings of low offset coefficients in these countries, Fry (1993) mentions “capital market imperfections, nonprice rationing of bank loans or exchange rate fexibility,” in addition to the capital controls in these countries. 84/ This can be derived using the following equations: M s = M d