| Sažetak: | This paper re-visits the topic of a common currency for the Pacific region,
comprising 14 Pacific island countries (PICs) and the region’s two advanced
countries, Australia and New Zealand. The PICs are highly dependent upon
Australia and New Zealand for trade in goods and services and aid inflows.
Earlier studies on regional common currency, which dealt with certain aspects
of the optimum currency area conditions, took into consideration three kinds
of shocks, namely shocks in world output, domestic output and price levels.
Since PICs’ growth is influenced by regional developments to a larger degree
than by world developments, this paper takes into consideration regional
shocks, in addition to shocks in global and national outputs. Using variance
decomposition analysis in this paper we investigate whether PICs and the
region’s two advanced countries could be suitable candidates for a currency union.
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