Shocks and Prospects for a Pacific Islands Currency Union

This analysis re-kindles the debate on the feasibility of a Pacific Islands currency union in view of the recent expansion and consolidation of regional strategies such as the Pacific Plan and the PACER Plus. Limited consideration has been given to the proposition for a Pacific Islands currency union. This paper exploits the OCA theoretical framework and employs the Gonzalo and Ng (2001) decomposition method in investigating the dynamic effects of permanent and transitory shocks on key macroeconomic variables among Pacific Island countries (PICs). Using newly constructed quarterly data in the analysis, evidence shows that the proposed union of six PICs (Fiji, PNG, Samoa, Solomon Islands, Vanuatu and Tonga) do not meet most of the preconditions for a union. However, further investigation shows evidence for the Melanesian countries (Fiji, PNG, Solomon Islands and Vanuatu) to possibly form a monetary union, preferably with the Australian dollar as the anchor currency. Nonetheless, further costs in terms of the alignment of policies by Melanesian countries are required.