| Abstract: | This article reviews the currency and trade experiences of the six Pacific states that issue their own currencies: Fiji, Papua New Guinea (PNG), Samoa, Solomon Islands, Tonga, and Vanuatu. At independence, these states were advised to adopt their own currencies by the colonial powers, the International Monetary Fund, and other international organisations. The former imperial countries dominated Pacific trade, but empirical data indicate that a large and increasing proportion of trade, now with emerging Asia, denominates its trade in US dollars. This article shows that the six Pacific states manage their currencies in relation to the US dollar. Optimal currency area theory suggests that independent Pacific states would gain substantially by adopting the US dollar in the place of their own currencies. Gravity‐model estimations for all Pacific islands were used to test this hypothesis. The results suggest that replacing their own currencies with an external currency, such as the US dollar, would substantially stimulate the independent Pacific states' trade. |
