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Regional integration in Latin America and dynamic gains from macroeconomic cooperation

Listed author(s):
  • Escaith, Hubert
  • Paunovic, Igor

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.

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File URL: http://repositorio.cepal.org/handle/11362/5388
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Paper provided by Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL) in its series Macroeconomía del Desarrollo with number 24.

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Date of creation: Jul 2003
Handle: RePEc:ecr:col037:5388
Note: Includes bibliography
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  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.
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