The Winner's Curse: Premature Monetary Integration in the NAFTA

During the 1990s the NAFTA has stimulated a process of financial integration which was not properly anticipated at the beginning of the decade or regulated under the treaty arrangement. The secular process of private sector currency substitution (dollarisation) stimulated by successive financial shocks now poses serious challenges for the conduct of North American monetary policy. Although the monetary calculus for a potential dollar area yields a positive outcome for peripheral members, historical experience suggests that the asymmetric impact of external shocks will require specific arrangements to contain the economic and social results. Further, the consequences of currency unification for capital markets under the gold standard, the sterling area, currency boards and the euro-zone have all meant that inter-governmental agreements for liquidity provision and prudential regulation have become necessary. This is the "winner's curse": the success of North American market integration is necessarily leading to a degree of institutional co-operation that US legislators have desired to avoid.