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Can South America form an optimal monetary area? A structural vector autoregression analysis

Author

Listed:
  • León Padilla

    (Universidad de las Américas)

  • Ángel Rodriguez García-Brazales

    (Ciudad Universitaria de Cantoblanco)

Abstract

This research analyzes the feasibility of adopting a common currency in South America using the Optimal Monetary Areas theory. Taking into account that the relative dominance of regional shocks in local output is considered a key indicator to adopt a regional currency, we use a structural vector autoregression (SVAR) model to determine what type of shock —among global, regional or country specific— prevails in South American economies. The results of variance decomposition demonstrate that the output trajectory of South American countries is mainly explained by country-specific shocks; therefore, South America as a whole is not considered not an optimal monetary area. However, we identified a group of countries —named Sud-5 (comprised of Chile, Peru, Ecuador, Brazil and Argentina)— for which the costs of a hypothetical monetary union would be relatively lower.

Suggested Citation

  • León Padilla & Ángel Rodriguez García-Brazales, 2021. "Can South America form an optimal monetary area? A structural vector autoregression analysis," International Economics and Economic Policy, Springer, vol. 18(2), pages 309-329, May.
  • Handle: RePEc:kap:iecepo:v:18:y:2021:i:2:d:10.1007_s10368-020-00490-2
    DOI: 10.1007/s10368-020-00490-2
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    More about this item

    Keywords

    South America; Common currency; SVAR; Variance decomposition;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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