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

León Padilla and Ángel Rodriguez García-Brazales ()
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Ángel Rodriguez García-Brazales: Ciudad Universitaria de Cantoblanco

International Economics and Economic Policy, 2021, vol. 18, issue 2, No 3, 309-329

Abstract: 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.

Keywords: South America; Common currency; SVAR; Variance decomposition (search for similar items in EconPapers)
JEL-codes: F33 F36 F41 F45 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10368-020-00490-2

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