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Optimal central bank areas, financial intermediation, and Mexican dollarization

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  • Alan C. Stockman

Abstract

This paper argues that the most important effects of Mexican dollarization would operate not through the standard "optimal currency area" channels, which involve gains from reducing costs of translating and exchanging currencies, gains from stabilization of business cycles. Nor would it operate through possible welfare improvements from dollarization as a commitment device for monetary policy. Instead, it would operate through the effects of dollarization on financial intermediation, investment, and economic growth. In particular, dollarization--like adoption of the Euro--would involve not only a change in the currency used to quote prices, perform accounting, and make transactions, but also to a change in central bank (for Mexico), with attendant changes in supervision, regulation, and monetary policies that, by affecting incentives of banks and other financial intermediaries, would affect the amount of financial intermediation and therefore overall investment and growth. Examples drawn from various theories of financial intermediation illustrate how the scale of intermediation can be affected by central bank policies, and how this affects the costs and benefits of dollarization.
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Suggested Citation

  • Alan C. Stockman, 2001. "Optimal central bank areas, financial intermediation, and Mexican dollarization," Proceedings, Federal Reserve Bank of Cleveland, pages 648-668.
  • Handle: RePEc:fip:fedcpr:y:2001:p:648-668
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    Cited by:

    1. George S. Tavlas, 2009. "Optimum-Currency-Area Paradoxes," Review of International Economics, Wiley Blackwell, vol. 17(3), pages 536-551, August.
    2. Pomfret, Richard, 2005. "Sequencing trade and monetary integration: issues and application to Asia," Journal of Asian Economics, Elsevier, vol. 16(1), pages 105-124, February.
    3. Marco Del Negro & Stephen J. Kay, 2002. "Global banks, local crises: bad news from Argentina," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 89-106.
    4. Richard Pomfret, 2003. "Formation and Dissolution of Monetary Unions: Evidence from Europe, and Lessons for Elsewhere," School of Economics Working Papers 2003-03, University of Adelaide, School of Economics.
    5. Gaetano Antinolfi & Todd Keister, 2001. "Dollarization as a monetary arrangement for emerging market economies," Review, Federal Reserve Bank of St. Louis, issue Nov., pages 29-40.

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