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Does a Monetary Union protect again foreign shocks? An assessment of Latin American integration using a Bayesian VAR

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  • Jean-Pierre Allégret

    ()
    (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France)

  • Alain Sand-Zantman

    ()
    (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France)

Abstract

This paper analyses the monetary consequences of the Latin-American trade integration process. We consider a sample of five countries –Argentina, Brazil, Chile, Mexico and Uruguay- spanning the period 1991-2007. The main question raised pertains to the feasibility of a monetary union between L.A. economies. To this end, we study whether this set of countries is characterized by business cycle synchronization with the occurrence of common shocks, a strong similarity in the adjustment process and the convergence of policy responses. We focus especially our attention on two points. First, we try to determine to what extent international disturbances influence the domestic business cycles through trade and/or financial channels. Second, we analyze the impact of the adoption of different exchange rate regimes on the countries’ responses to shocks. All these features are the main issues in the literature relative to regional integration and OCA process.

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Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0809.

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Length: 20 pages
Date of creation: 2008
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Handle: RePEc:gat:wpaper:0809

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Keywords: bayesian VAR; business cycles; Latin American countries; optimum currency area;

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  2. Larrain Felipe & Jose Tavares, 2003. "Regional Currencies Versus Dollarization: Options for Asia and the Americas," Journal of Economic Policy Reform, Taylor & Francis Journals, Taylor & Francis Journals, vol. 6(1), pages 35-49.
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  14. Ahmed, Shaghil, 2003. "Sources of economic fluctuations in Latin America and implications for choice of exchange rate regimes," Journal of Development Economics, Elsevier, vol. 72(1), pages 181-202, October.
  15. Salvatore, Dominick, 2001. "Which countries in the Americas should dollarize?," Journal of Policy Modeling, Elsevier, Elsevier, vol. 23(3), pages 347-355, April.
  16. Hallwood, Paul & Marsh, Ian W. & Scheibe, Jorg, 2006. "An assessment of the case for monetary union or official dollarization in five Latin American countries," Emerging Markets Review, Elsevier, vol. 7(1), pages 52-66, March.
  17. Robert B. Litterman, 1984. "The costs of intermediate targeting," Working Papers 254, Federal Reserve Bank of Minneapolis.
  18. 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.
  19. Allan Timmermann & Luis Catão & Marco Aiolfi, 2006. "Common Factors in Latin America's Business Cycles," IMF Working Papers 06/49, International Monetary Fund.
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