tend to operate at the margin and will tend to be more effective in tight liquidity situations and costly for the central bank in excess liquidity situations, as a couple of our neighbours can attest. a common currency key among the policy choices for monetary implementation in the region will be a common currency. the proposal for a single economic space for the caribbean region is not new. it has been suggested from time to time over the last few decades in one form or another, as part of promoting regional economic cooperation. a common currency represents the ultimate in the economic integration of states and is normally the product of a currency union. it is a zone of countries or a region, where a single currency circulates, a single monetary authority or central bank operates, a single exchange rate policy prevails and the single monetary authority often maintains a common pool of reserves. the literature identifies the following as key deciding factors for a currency union : openness, high intra - union trade, a high degree of product diversification, similarity in industrial structures, high correlation in economic activities, similar inflation rates, flexibility in wages and prices and factor mobility. there are many compelling reasons in favour of a common caribbean currency. currently, the overwhelming majority of regional trade is conducted using the us dollar which fetches vastly different values against the various regional currencies, whether fixed or floating. if we do nothing the numeraire currency will be the us dollar – by default. a single currency for the region would lead to elimination of transaction costs and of volatility in exchange rates among members of the regional grouping. just as a common language promotes communication among people, a common currency could promote trade and investment among countries in the region. these benefits will have to be weighed against the likely costs that have to be incurred by the region. these would involve the costs of discontinuing their own independent currencies by replacing with the common currency, and the loss of seigniorage revenue from printing their own currencies. the gains from a currency union, which are in terms of increased efficiency, arise primarily from two sources. the first is that a common currency eliminates transaction costs usually incurred when trade and investment transactions need currency conversion. secondly, a common currency eliminates risk from the uncertainty associated with the differences in exchange rates between trading partners. one more gain is that a currency union provides a potential for reinforcing fiscal discipline and credibility of monetary policy. there are also disadvantages to a common currency

markets and financial market instruments allow risks to be shared more broadly and capital to flow to where the returns are expected to be the highest. the recent spurt in integration has occurred during a sustained period of relatively strong and steady growth on a global scale and of relatively stable and low inflation rates. these improvements in outcomes have surfaced amidst a number of other important changes in the environment, including significant technological progress and better economic policies steady growth in latin america and the caribbean and more stable emerging economies particularly in latin america. but even without being able to assign precise shares to all the contributing factors, we know that greater integration and openness are likely to have been particularly important in the caribbean case. china through its central bank the national bank of china has become the repository of vast foreign exchange reserves principally in us dollars. china is also competing with many of the international lending agencies for the attention of many west african countries, where access to less complicated loans are becoming attractive. regional economic units are looking to each other and to their central banks for balance of payments support rather than to international institutions. also private credit markets are now accessible to central banks and to governments in a way which did not obtain in the past. economic modeling and monetary policy all of these developments have impacted on the way in which central banks do business. many central banks in the region are therefore redesigning their policy responses, not only in the context of global forces but in the context of adjusting to the fact of greater regional economic and financial integration. our models however are pressed to catch up with the changes. economic theory is most comfortable with fully integrated systems in which prices and flows of goods and services along with real and financial capital respond continuously and completely to market forces. significantly harder to capture in our models are those factors that do not fully, or quickly, adjust to market incentives, or where those incentives are hidden. in the dynamic landscape of the 21st century, economic modeling has therefore become the subject of continuous adjustment as relationships and responses on which these models are based, change more frequently and become less standardized as national and regional flows, policies and economic decisions accommodate to each other. yet in the world of risk management instruments it is expectations that are important and margins of error have to be minute in order for financial markets to be efficient and avoid major losses. this is a challenge for developing countries who need to manage risks but have thin financial markets. at the same time traditional armour of central banking is also subject to continual adjustment. new relations and responses have the potential