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Prepared by Yan Sun and Rupa Duttagupta.
The other currency union is formed by the CFA franc zone consolidating the two economic unions in Africa—West African Economic and Monetary Union (WAEMU) and the Economic and Monetary Community of Central Africa (CEMAC). While the ECCU fixed exchange rate is supported by a quasi-currency board arrangement—in that the Eastern Caribbean Central Bank needs to cover only 60 percent of its domestic liabilities with foreign reserves—in actuality it operates like a full fledged currency board with almost full coverage of demand liabilities.
The ECCU region is moving toward an Organization of Eastern Caribbean States (OECS) Economic Union. A draft Treaty was approved by OECS member countries in May 2007.
Windward Island countries are Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines. Leeward Island countries are Antigua and Barbuda and St. Kitts and Nevis.
One caveat is that the production of nontradables would include tradable inputs, which we are unable to take into account in the absence of more disaggregated data on the price indexes in ECCU CPI baskets.
This chapter uses “real exchange rate stability” and “purchasing power parity (PPP)” interchangeably, as the real exchange rate may be viewed as a measure of the deviation from PPP. See Sarno and Taylor (2002) for a literature survey on the real exchange rate and PPP.
Dominica has allowed full pass through from world oil prices to domestic retail fuel prices since late 2003. Grenada and St. Kitts and Nevis liberalized the determination of retail gasoline prices in late 2006.