The Governor or the Sheriff? Pacific Island Nations and Dollarization

Abstract

Recent political discussions in Australia have suggested that Pacific Island nations should dollarize to the Australian dollar. This is seen as a way to stabilise the economies of the region, which have been fraught with political and economic uncertainty. Asia is overtaking Australia as a dominant trading partner with major Pacific Island economies, and standard analysis techniques indicate that dollarization to the US dollar is preferable to dollarization with the Aussie. A discussion of currency reform in the Pacific should at least consider US dollarization, as Australia's economic influence may not be as signficiant as previously assumed.

Keywords: Foreign exchange, monetary relations, dollarization

JEL Classification: E0, E5