Assessing Business Cycle Synchronisation - Prospects for a Pacific Islands Currency Union

Abstract

On-going debate of a Pacific Islands currency union has rekindled the argument on whether Pacific Island Countries (PICs) demonstrate symmetric behavior in their business cycles as a precondition for a union according to the OCA theory. Unfortunately for the PICs, there are no empirical studies undertaken involving the analysis of business cycle synchronization. This paper measures business cycles for PICs employing a number of techniques and using newly constructed quarterly GDP data by Lahari et al. (2011), including Australia and New Zealand, and evaluates their degree of synchronization. The results showed that it was not feasible for the PICs as a group to form a union. Although, further analysis showed mixed results for the Melanesian sub-group, the argument for a Melanesian union was based on similar positive directions in their business cycles. Further structural adjustments and policy harmonization are still required for all PICs including the Melanesian sub-group.