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Why Should Emerging Economies Give up National Currencies: A Case for 'Institutions Substitution'

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  • Enrique G. Mendoza

Abstract

Financial contagion and Sudden Stops of capital inflows experienced in emerging-markets crises may originate in an explosive mix of lack of policy credibility and world capital market imperfections that afflict emerging economies with national currencies. Hence, this paper argues that abandoning national currencies to adopt a hard currency can significantly reduce the emerging countries' vulnerability to these crises. The credibility of their financial policies would be greatly enhanced by the implicit subordination to the policy-making institutions of the hard currency issuer. Their access to international capital markets would improve as the same expertise and information that global investors gather already to evaluate the monetary policy of the hard currency issuer would apply to emerging economies. Yet, adopting a hard currency does not eliminate business cycles, rule out all forms of financial crises, or solve severe fiscal problems that plague emerging economies, and it entails giving up seigniorage and potential benefits of conducting independent monetary policy. However, these disadvantages seem dwarfed by the urgent need to enable emerging countries to access global capital markets without exposing them to the risk of recurrent Sudden Stops.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8950.

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Date of creation: May 2002
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Publication status: published as Mendoza, Enrique G. “Porqué las Economías Emergentes Deberian Renunciar a las Monedas Nacionales: Un Caso para la Sustitución de Instituciones,” (Why Should Emerging Economies Give up National Currencies: A Case for ‘Institutions Substitution.') El Trimestre Economico LXXI (1) 281 (Enero-Marzo 2004).
Handle: RePEc:nbr:nberwo:8950

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Cited by:
  1. Roberto Duncan, 2003. "Floating, Official Dollarization, and Macroeconomic Volatility:An Analysis for the Chilean Economy," Working Papers Central Bank of Chile 249, Central Bank of Chile.
  2. Philip R. Lane, 2003. "Business Cycles and Macroeconomic Policy in Emerging Market Economies," Trinity Economics Papers 20032, Trinity College Dublin, Department of Economics.
  3. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel, 2003. "The Role of Credibility in the Cyclical Properties of Macroeconomic Policies in Emerging Economies," Working Papers Central Bank of Chile 237, Central Bank of Chile.
  4. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel, 2014. "Do Good Institutions Promote Counter-cyclical Macroeconomic Policies?," Working Papers 2014-3, Peruvian Economic Association.
  5. Jeffrey A. Frankel & Shang-Jin Wei, 2004. "Managing Macroeconomic Crises," NBER Working Papers 10907, National Bureau of Economic Research, Inc.
  6. Cruz Rodriguez, Alexis, 2009. "Choosing and assessing exchange rate regimes: A survey of the literature," MPRA Paper 16314, University Library of Munich, Germany.
  7. Roberto Duncan, 2003. "Exploring the Implications of Official Dollarization on Macroeconomic Volatility," Working Papers Central Bank of Chile 200, Central Bank of Chile.
  8. Brahima Coulibaly, 2012. "Monetary policy in emerging market economies: what lessons from the global financial crisis?," International Finance Discussion Papers 1042, Board of Governors of the Federal Reserve System (U.S.).
  9. Fabrizio Onida, 2004. "Crescita e vincolo esterno: quali strategie per promuovere stabilità macroeconomica, competitività e investimenti," KITeS Working Papers 157, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jul 2004.
  10. Philipp Paulus, 2004. "The fiscal stability impact of monetary unions - looking beneath the Stability Pact debate," Otto-Wolff-Institut Discussion Paper Series 05/2004, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
  11. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel., 2010. "Institutions and Cyclical Properties of Macroeconomic Policies in the Global Economy," Documentos de Trabajo 372, Instituto de Economia. Pontificia Universidad Católica de Chile..

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