Banana price shocks and adjustment within a unified currency area

The paper traces the impact of a shock to banana prices on key macroeconomi c variables for the Windward Islands and the Eastern Caribbean Central Bank (ECCB) Monetary Union as a whole. Net foreign assets of Dominica are expec ted to show the largest decline while those for Grenada the least. The impa ct on the net foreign assets of the subregion may be mitigated by other for eign exchange inflows. In addition there was little variation in the growth in M1 with the exception of Dominica suggesting money-output neutrality. G overnment revenues were not adversely affected suggesting that the terms of trade shock may be viewed as being temporary and agents borrow to maintain existing tastes and preferences. This result hinged on the nexus between g overnment revenue and the reliance on trade taxes on imports suggesting som e ambiguity in the explanation of the Harberger-Laursen-Meltzer effect.