Evaluating the costs and benefits of exchange rate stability, requires a different approach to Mercosur than to the European Union (EU). Trade integration within Mercosur is much more limited; currencies are driven by other factors such as confidence in the ability to serve external debt and the solidity of domestic political institutions. This also implies that the correlation between exchange rates and interest rates is different. This research paper at first provides a comparative picture of the degree of trade integration within the EU, and within the Southern Cone. It then investigates the correlation between two aspects of financial market volatility—exchange rate and interest rate volatility—and compares the situation in the Southern Cone and in the EU between the 1980s to 1990s.
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