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Monetary Integration in the Southern Cone: Mercosur Is Not Like the EU

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Abstract

Evaluating the costs and benefits of exchange rate stability requires a somewhat different approach for Mercosur than for the EU. EU member countries are highly integrated in terms of trade in goods and services. By contrast, trade integration within Mercosur is much more limited, intra-area exchange rates are thus less important than the exchange rate vis-a-vis the dollar and the euro. This contribution analyses the impact of both aspects of financial volatility (exchange rate and interest rate volatility) on investment and labour markets in the Southern Cone, finding that both exchange rate variability (mainly against the dollar and the euro) and (domestic) interest rate volatility have a significant dampening impact on employment and investment, as predicted by our theoretical model.
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Suggested Citation

  • Ansgar Belke & Daniel Gros, 2002. "Monetary Integration in the Southern Cone: Mercosur Is Not Like the EU," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 204/2002, Department of Economics, University of Hohenheim, Germany.
  • Handle: RePEc:hoh:hohdip:204
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    1. Darby, Julia, et al, 1999. "The Impact of Exchange Rate Uncertainty on the Level of Investment," Economic Journal, Royal Economic Society, vol. 109(454), pages 55-67, March.
    2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    3. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
    4. Abel, Andrew B. & Eberly, Janice C., 1999. "The effects of irreversibility and uncertainty on capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 339-377, December.
    5. Carmen M. Reinhart & Vincent Raymond Reinhart, 2002. "What Hurts Emerging Markets Most? G3 Exchange Rate or Interest Rate Volatility?," NBER Chapters,in: Preventing Currency Crises in Emerging Markets, pages 133-170 National Bureau of Economic Research, Inc.
    6. Ansgar Belke & Daniel Gros, 2001. "Real Impacts of Intra-European Exchange Rate Variability: A Case for EMU?," Open Economies Review, Springer, vol. 12(3), pages 231-264, July.
    7. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc.
    8. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate of the Effect of Common Currencies on Trade and Income," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 437-466.
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    Cited by:

    1. Ansgar Belke & Ralph Setzer, 2004. "Incertitude sur le taux de change et chômage dans les pays candidats : un argument pour leuroïsation," Économie et Prévision, Programme National Persée, vol. 163(2), pages 63-74.
    2. Sánchez-Martín, Miguel Eduardo & de Arce, Rafael & Escribano, Gonzalo, 2014. "Do changes in the rules of the game affect FDI flows in Latin America? A look at the macroeconomic, institutional and regional integration determinants of FDI," European Journal of Political Economy, Elsevier, vol. 34(C), pages 279-299.
    3. Belke, Ansgar & Gros, Daniel, 2002. "Monetary integration in the Southern Cone," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 323-349, December.
    4. Cohen, Joseph N., 2008. "Managing the Faustian bargain: monetary autonomy in the pursuit of development in Eastern Europe and Latin America," MPRA Paper 22435, University Library of Munich, Germany.
    5. BELKE Ansgar & SETZER Ralph, "undated". "The Costs of Exchange Rate Volatility for Labor Markets: Some Empirical Evidence from the CEE Economies," EcoMod2003 330700012, EcoMod.
    6. Hochreiter, Eduard & Schmidt-Hebbel, Klaus & Winckler, Georg, 2002. "Monetary union: European lessons, Latin American prospects," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 297-321, December.
    7. Ansgar Belke, 2002. "EU Enlargement, Exchange Rate Variability and Labor Market Performance," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 213/2002, Department of Economics, University of Hohenheim, Germany.
    8. Mejia-Reyes, P., 2004. "Classical Business Cycles in America: Are National Business Cycles Synchronised?," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 1(3), pages 75-102.
    9. John Hawkins & Paul Masson, 2003. "Economic aspects of regional currency areas and the use of foreign currencies," BIS Papers chapters,in: Bank for International Settlements (ed.), Regional currency areas and the use of foreign currencies, volume 17, pages 4-42 Bank for International Settlements.
    10. Christoph S. Weber, 2017. "The Unemployment Effect of Central Bank Transparency," Working Papers 172, Bavarian Graduate Program in Economics (BGPE).

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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