IDEAS home Printed from https://ideas.repec.org/p/ecr/col037/5388.html
   My bibliography  Save this paper

Regional integration in Latin America and dynamic gains from macroeconomic cooperation

Author

Listed:
  • Escaith, Hubert
  • Paunovic, Igor

Abstract

The objective of this paper is to present and illustrate from a game-theory perspective, the main concepts and challenges behind macroeconomic policy cooperation in Latin America and the Caribbean. Examples are taken from fiscal, monetary and exchange rate policies in a regional framework. Translating these concepts and examples into the economics of sub-regional integration, when countries have increasing commercial and financial relations, interact frequently and cannot escape from the consequences their decisions have on their partners, the paper contend that entering into a cooperative dynamic will be beneficial for all cooperative participants. Moreover, it is shown that because the welfare gains from regional cooperation are endogenous, cooperation will eventually become stable, even in the presence of a Prisoner's Dilemma. The concepts of static games are initially introduced to identify some of the costs and benefits of regional macroeconomic coordination. The arguments are developed using the example of tax and subsidy policies and the competition to attract foreign investment. Then, the document incorporates the dynamic aspects of cooperation, in particular the notion of time consistency. A review of the costs and benefits of regional coordination of macroeconomic policies is presented, from a dynamic point of view. The notion of endogenously determined criteria to form an optimal currency area is then introduced. We demonstrate that even when initial conditions are less than optimal, macroeconomic policy coordination within sub-regional integration schemes can lead to a stable cooperative situation. Nevertheless, at the initial stage of coordination, the benefits are uncertain and cooperation is unstable; consequently a formal institutional setting is necessary to start and coordinate the cooperative process, at least in its earlier stage.

Suggested Citation

  • Escaith, Hubert & Paunovic, Igor, 2003. "Regional integration in Latin America and dynamic gains from macroeconomic cooperation," Macroeconomía del Desarrollo 24, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
  • Handle: RePEc:ecr:col037:5388
    Note: Includes bibliography
    as

    Download full text from publisher

    File URL: http://repositorio.cepal.org/handle/11362/5388
    Download Restriction: no

    References listed on IDEAS

    as
    1. Escaith, Hubert & Inoue, Keiji, 2001. "Small economies' tariff and subsidy policies in the face of trade liberalization of the Americas," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34828, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Ernesto H. Stein & Natalia Salazar & Roberto Steiner & Eugenio Díaz-Bonilla & Marco Bonomo & Juan C. Jaramillo & Hector E. Schamis & Alberto Pascó-Front & Piero Ghezzi & Maria Cristina Terra & José De, 2001. "The Currency Game: Exchange Rate Politics in Latin America," IDB Publications (Books), Inter-American Development Bank, number 77398 edited by Ernesto H. Stein & Jeffry Frieden, February.
    3. repec:idb:brikps:77398 is not listed on IDEAS
    4. Demopoulos, George D. & Yannacopoulos, Nicholas A., 2001. "On the optimality of a currency area of a given size," Journal of Policy Modeling, Elsevier, vol. 23(1), pages 17-24, January.
    5. Hubert Escaith & Christian Ghymers & Rogerio Studart, 2005. "Regional Integration and the Issue of Choosing an Appropriate Exchange Rate Regime in Latin America," Chapters,in: Regional Currency Areas in Financial Globalization, chapter 8 Edward Elgar Publishing.
    6. Escaith, Hubert, 2001. "The small economies of Latin America and the Caribbean," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    7. Ocampo, José Antonio, 2001. "International asymmetries and the design of the International Financial System," Series Históricas 15, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    8. ., 1998. "Game Theory," Chapters,in: The Handbook of Economic Methodology, chapter 42 Edward Elgar Publishing.
    9. repec:idb:idbbks:391 is not listed on IDEAS
    10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Foresti, Pasquale, 2007. "Is Latin America an Optimal Currency Area? Evidence from a Structural Vector Auto-regression analysis," MPRA Paper 2961, University Library of Munich, Germany, revised Apr 2008.
    2. Escaith, Hubert, 2003. "Modeling regional macroeconomic interactions: situation and perspectives for macroeconomic coordination in Latin America. Background paper prepared for the REDIMA workshop on Modeling Macroeconomic Co," Documentos de Proyectos 4, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    3. Solimano, Andrés & Soto, Raimundo, 2005. "Economic growth in Latin America in the late 20th century: evidence and interpretation," Macroeconomía del Desarrollo 33, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    4. Solimano, Andrés, 2006. "Asset accumulation by the middle class and the poor in Latin America: political economy and governance dimensions," Macroeconomía del Desarrollo 55, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    5. Christian Volpe Martincus & Andrea Molinari, 2007. "Regional Business Cycles and National Economic Borders: What Are the Effects of Trade in Developing Countries?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(1), pages 140-178, April.
    6. Solimano, Andrés, 2006. "The international mobility of talent and its impact on global development: an overview," Macroeconomía del Desarrollo 52, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    7. Solimano, Andrés, 2004. "Political violence and economic development in Latin America: issues and evidence," Macroeconomía del Desarrollo 30, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    8. Solimano, Andrés & Watts, Nathalie, 2005. "International migration, capital flows and the global economy: a long run view," Macroeconomía del Desarrollo 35, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    9. Ghymers, Christian, 2005. "Fostering economic policy coordination in Latin America: the REDIMA approach to escaping the prisoner's dilemma," Libros de la CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 82 edited by Eclac.
    10. Solimano, Andrés & Gutiérrez, Mario A., 2006. "Savings, investment and growth in the global age: analytical and policy issues," Macroeconomía del Desarrollo 53, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecr:col037:5388. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Biblioteca CEPAL). General contact details of provider: http://edirc.repec.org/data/eclaccl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.