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An Evaluation of Monetary Regime Options for Latin America

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Author Info
Andrew Berg
Eduardo Borensztein
Paolo Mauro

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Abstract

Over the past decade, most Latin American countries have moved toward either extreme of floating rates or dollarization, in line with worldwide trends. In this paper, we evaluate the wisdom of those decisions and the choice of monetary regime more generally. We first evaluate the desirability of adopting a common currency in the region. We find that, under present circumstances, the costs of a common currency are likely to outweigh its benefits, as these countries do not trade much with each other and, moreover, they face diverse economic shocks, their business cycles are not coordinated, and they are affected by common shocks to sentiment in international financial markets only to the same extent than the average pair of emerging markets. We next consider the unilateral dollarization option. For most Latin American countries, this would be desirable only when there are strong links to the US economy, the credibility of the monetary authorities is irreversibly lost, and there is a keen demand for dollar-denominated financial assets. Finally, we review the relatively short experience of floating exchange regimes in Latin America and find that, despite the external constraints, floating countries have retained sufficient flexibility to use monetary policy for domestic ends in response to important shocks.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 178.

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Date of creation: Aug 2002
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Handle: RePEc:chb:bcchwp:178

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Vittorio Corbo, 2002. "Another Look at Exhange Rate and Monetary Regime Options for Latin America," Documentos de Trabajo 228, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  2. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting, Exchange Rate Pass-Through and 'Fear of Floating'," Studies in Economics 0605, Department of Economics, University of Kent. [Downloadable!]
  3. Guglielmo Maria Caporale & Davide Ciferri & Alessandro Girardi, 2008. "Fiscal Shocks and Real Exchange Rate Dynamics: Some Evidence for Latin America," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Fabrizio Onida, 2004. "Crescita e vincolo esterno: quali strategie per promuovere stabilità macroeconomica, competitività e investimenti," CESPRI Working Papers 157, CESPRI, Centre for Research on Innovation and Internationalisation, Universita' Bocconi, Milano, Italy, revised Jul 2004. [Downloadable!]
  5. Eichengreen, Barry & Taylor, Alan M, 2003. "The Monetary Consequences of A Free Trade Area of the Americas," CEPR Discussion Papers 3909, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Alicia García Herrero & Pedro del Río, 2003. "Financial stability and the design of monetary policy," Banco de España Working Papers 0315, Banco de España. [Downloadable!]
  7. Sebastian Edwards, 2006. "Monetary unions, external shocks and economic performance: A Latin American perspective," International Economics and Economic Policy, Springer, vol. 3(3), pages 225-247, December. [Downloadable!] (restricted)
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  8. Nannette Lindenberg & Frank Westermann, 2009. "How Strong is the Case for Dollarization in Costa Rica? A Note on the Business Cycle Comovements with the United States," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  9. Vittorio Corbo, 2002. "Exchange Rate Regimes in the Americas: Is Dollarization the Solution?," Documentos de Trabajo 229, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  10. HOLLAND, Márcio & LUIZ CARLOS, BRESSER-PEREIRA, 2009. "Common currency and economic integration in mercosur," Textos para discussão 190, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil). [Downloadable!]
  11. Jean-Pierre Allegret & Alain Sand-Zantman, 2007. "Modeling the impact of real and financial shocks on Mercosur: the role of the exchange rate regime," Post-Print halshs-00142506_v1, HAL. [Downloadable!]
  12. Kenneth Rogoff & Ashoka Mody & Nienke Oomes & Robin Brooks & Aasim M. Husain, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 03/243, International Monetary Fund. [Downloadable!]
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  13. Alexandre Minda, 2005. "La dollarisation intégrale : une option monétaire de dernier ressort pour l'Amérique latine ?," Mondes en développement, De Boeck Université, vol. 130(2), pages 15-39. [Downloadable!]
  14. Jean-Pierre Allegret & Alain Sand-Zantman, 2009. "Modeling the Impact of Real and Financial Shocks on Mercosur: The Role of the Exchange Rate Regime," Open Economies Review, Springer, vol. 20(3), pages 359-384, July. [Downloadable!] (restricted)
  15. Alicia García Herrero & Pedro del Río López, 2003. "Implications of the design of monetary policy for financial stability," Macroeconomics 0304008, EconWPA. [Downloadable!]
  16. J. Anchieta Neves & Leandro Stocco & Sergio Da Silva, 2008. "Is Mercosur an optimum currency area? An assessment using generalized purchasing power parity," Economics Bulletin, Economics Bulletin, vol. 6(29), pages 1-13. [Downloadable!]
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