This paper empirically investigates international and domestic monetary policy transmission mechanisms in the Eastern Caribbean Currency Union (ECCU). We assess interest rate pass-through of both the U.S. policy rate and the ECCU minimum saving deposit rate (MSR) into domestic interest rates through the interest rate channel. While economic theory suggests that the international pass-through should be high in small open economies with fixed exchange rates and open capital accounts, our findings, based on regression analysis, point to a low long-run pass-through coefficient of the U.S. interest rate. The domestic transmission channel, however, is found to operate through changes in the MSR. The results hold for different interest rates (deposit and lending) and are supported by survey-based findings.
Managing resource revenues is a critical policy issue for small open resource-rich countries. This paper uses an open economy dynamic stochastic general equilibrium model to analyze the transmission of resource price shocks and a shock to resource production in the Trinidad and Tobago economy. It also applies alternative fiscal rules to determine the optimal allocation of resource windfalls between spending today and saving in a sovereign wealth fund. The results show that spending all the resource windfall on consumption and investment creates more volatility and amplifies Dutch disease effects, when compared to the case where all the excess revenues are saved. Also, neither a policy of full spending nor full saving of the surplus revenue inflows is optimal if the government is concerned about both household welfare and fiscal stability. In order to minimize deviations from both objectives, the optimal fiscal response suggests that a larger fraction of the resource windfalls should be saved.
International Monetary Fund. Western Hemisphere Dept.
This paper features Grenada’s request for waiver of non-observance of a performance criterion, request for modification of a performance criterion, and financing assurances review. The arrangement was approved on June 26, 2014, and the third review was completed on November 25, 2015. Grenada’s comprehensive public debt restructuring is nearing completion. The debt exchange with Grenada’s largest private creditor group was implemented, and an agreement reached with Paris Club creditors. Discussions focused on completing the programmed fiscal consolidation, finalizing reforms to Grenada’s fiscal policy framework, and improving competitiveness and growth prospects. Staff proposes to refine the structural benchmark on public sector modernization to focus specifically on public wage bill management.
This paper reviews recent developments in the financing of the Fund’s concessional lending and debt relief since the October 2014 Update. It presents the latest available data including the new commitments of loan resources to the PRGT and the sources of initial financing for the newly created CCR Trust, replacing the PCDR Trust. It also discusses the PRGT’s potential self sustaining capacity in the context of longer term projections of the demand for concessional lending and robustness to alternative scenarios.
This paper has two objectives. First, it reviews the recent dynamics of global imbalances (both “flow” and “stock” imbalances), with a special focus on the shifting position of Latin America in the global distribution. Second, it examines the cross-country variation in external adjustment over 2008-2012. In particular, it shows how pre-crisis external imbalances have strong predictive power for post-crisis macroeconomic outcomes, allowing for variation across different exchange rate regimes. We emphasize that the bulk of external adjustment has taken the form of “expenditure reduction”, with “expenditure switching” only playing a limited role.
This paper seeks to determine the effects that natural disasters have on per capita GDP and on the debt to GDP ratio in the Caribbean. Two types of natural disasters are studied –storms and floods– given their prevalence in the region, while considering the effects of both moderate and severe disasters. I use a vector autoregressive model with exogenous natural disasters shocks, in a panel of 12 Caribbean countries over a period of 40 years. The results show that both storms and floods have a negative effect on growth, and that debt increases with floods but not with storms. However, in a subsample I find that storms significantly increase debt in the short and long run. I also find weak evidence that debt relief contributes to ease the negative effects of storms on debt.
Caribbean economies face high and rising debt-to-GDP ratios that jeopardize prospects for medium-term debt sustainability and growth. This book provides a comprehensive analysis of the challenges of fiscal consolidation and debt reduction in the Caribbean. It examines the problem of high debt in the region and discusses policy options for improving debt sustainability, including fiscal consolidation, robust growth, and structural reforms. The book also examines empirically the factors underlying global large debt reduction episodes to draw important policy lessons for the Caribbean. It also reviews the literature on successful fiscal consolidation experiences and provides an overview of past and current consolidation efforts in the Caribbean. The book concludes that the region needs a broad and sustained package of reforms to reduce debt ratios to more manageable levels and strengthen economic resilience.
Mr. Alfred Schipke, Aliona Cebotari, and Ms. Nita Thacker
The Eastern Caribbean Economic and Currency Union (OECS/ECCU) is one of four currency unions in the world. As in other parts of the world in the aftermath of the global economic and financial crisis, the region is at a crossroads, facing the major challenges of creating jobs, making growth more inclusive, reforming the banking system, and managing volatility, while grappling with high public debt and persistent low economic growth. Policymakers have the critical task of implementing strong reforms to strengthen the monetary union while also laying the foundation for accelerating growth. This Handbook provides a comprehensive analysis of the key issues in the OECS/ECCU, including its organization and economic and financial sector linkages, and provides policy recommendations to foster economic growth.
This paper presents background on Caribbean small states as context for the main paper, “Macroeconomic Issues in Small States and Implications for Fund Engagement.” It draws on recent analytical work presented at a conference for policy makers in September 2012, in Trinidad and Tobago. Caribbean small states, while sharing many features of other small states (size-related macroeconomic vulnerabilities, lack of economies of scale, and capacity constraints) have specific characteristics which merit attention
Charles Amo Yartey, Mr. Machiko Narita, Mr. Shelton M Nicholls, and Mr. Joel Chiedu Okwuokei
This paper examines debt dynamics in the Caribbean and discusses policy options for reducing the high debt levels. Based on empirical studies of factors underlying global large debt reduction episodes, important policy lessons are drawn for the Caribbean. The analysis shows that major debt reductions are associated with strong growth and decisive and lasting fiscal consolidation efforts. Since growth in the current environment is virtually nonexistent, significant fiscal consolidation is inevitable in the region. Better control of the public wage bill, increasing public sector efficiency and tackling transfers are the obvious targets to reduce spending. On the revenue side, there is ample room to reduce tax expenditures, eliminate distortions while broadening the tax base. Fiscal consolidation needs to be complemented by a comprehensive debt reduction strategy including tax policy reforms and structural reforms to boost competiveness.