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Economics Research International
Volume 2012 (2012), Article ID 368265, 9 pages
http://dx.doi.org/10.1155/2012/368265
Research Article

Role of Money in Smaller Pacific Island Countries

1School of Economics, Faculty of Business and Economics, The University of the South Pacific, Laucala Bay Road, Suva, Fiji
2Centre for Economic Studies, Faculty of Business and Finance, Universiti Tunku Abdul Rahman, Perak Campus, Jalan Universiti, Bandar Barat, Perak Darul Ridzuan, 31900 Kampar, Malaysia

Received 5 August 2011; Revised 24 November 2011; Accepted 5 January 2012

Academic Editor: Paresh Kumar Narayan

Copyright © 2012 T. K. Jayaraman and Chee-Keong Choong. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Pacific island countries (PICs), which attained political independence, are open economies with very small manufacturing base and narrow range of exports of copra and tuna. They are highly dependent on imports ranging from food and mineral fuels to intermediate and capital goods and transport machinery. Four of the 14 PICs, namely Samoa, Solomon Islands, Tonga, and Vanuatu, have independent currencies with usual paraphernalia of central banks under fixed exchange rate regimes. Their financial sectors are small and with undeveloped money and capital markets. The nominal exchange rate as an anchor has served the four PICs well by keeping inflation low. The objective of the paper is to investigate whether money has played any significant part in output growth as well as determination of prices in PICs. The findings are that broad money (M2) and exchange rate have a long run as well as short-run casual relationship with both output and prices in all PICs.