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 “optimal currency area” criteria. These include: (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’ performance on four dimensions: (a) whether countries without a national currency have a lower occurrence of “sudden stop” episodes; (b) whether they have a lower occurrence of “current account reversal” episodes; (c) what is their ability to absorb international terms of trade shocks; and (d) what is their ability to absorb “sudden stops” and “current account reversals” shocks. I find that belonging to a currency union does not lower the probability of facing a sudden stop or a current account reversal. I also find that external shocks are 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 Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number
126.
Length: 59 pages Date of creation: 06 May 2006 Date of revision: Handle: RePEc:onb:oenbwp:126
Note: The paper includes a comment by Enrique Alberola. Contact details of provider: Postal: P.O. Box 61, A-1011 Vienna, Austria Phone: +43/1/404 20 7205 Fax: +43/1/404 20 7299 Email: Web page: http://www.oenb.at/ More information through EDIRC
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