The fourteen Pacific island countries, under the auspices of their regional organization known as the Pacific Forum, launched two major initiatives in 2002 to introduce unhindered trade amongst themselves by 2010 and usher in an enlarged free trade area with Australia and New Zealand by 2015. Thus, trade integration efforts are expected to lead to greater economic integration of the region. In the meanwhile, in 2003 Australia mooted the idea of a single currency for the region as a whole. Although the Pacific Forum, which also includes Australia and New Zealand, has not formally discussed the proposal so far, there is considerable debate ongoing on the subject of common currency. This paper examines the patterns of shocks, which have affected the region during the last two decades; seeks to investigate whether these shocks have been of similar nature; and evaluates whether these countries are presently suitable candidates for a currency union so that union-wide policies in the event of a currency union can be successfully pursued.

JEL Classifications: F3, F4