During the last few years there has been a renewed analysis in currency unions as a form of monetary arrangement. This new interest has been largely triggered by the Euro experience. Scholars and policy makers have asked about the optimal number of currencies in the world economy. They have analyzed whether different countries satisfy the traditional %u201Coptimal currency area%u201D criteria. These include, among other: (a) the synchronization of the business cycle; (b) the degree of factor mobility; and (c) the extent of trade and financial integration. In this paper I analyze the desirability of a monetary union from a Latin American perspective. First, I review the existing literature on the subject. Second, I use a large data set to analyze the evidence on economic performance in currency union countries. I investigate these countries%u2019 performance on four dimensions: (a) whether countries without a national currency have a lower occurrence of %u201Csudden stop%u201D episodes; (b) whether they have a lower occurrence of %u201Ccurrent account reversal%u201D episodes; (c) what is their ability to absorb international terms of trade shocks; and (d) what is their ability to absorb %u201Csudden stops%u201D and %u201Ccurrent account reversals%u201D shocks. I find that belonging to a currency union has not lower the probability of facing a sudden stop or a current account reversal. I also find that external shocks have been amplified in currency union countries. The degree of amplification is particularly large when compared to flexible exchange rate countries.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12229.
Length: Date of creation: May 2006 Date of revision: Handle: RePEc:nbr:nberwo:12229
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Find related papers by JEL classification: F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
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