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Monetary Unions, External Shocks and Economic Performance: A Latin American Perspective

Sebastian Edwards ()

No 43, Working Papers from Bank of Greece

Abstract: During the last few years there has been a renewed analysis in currency unions as a form of monetary arrangement. This new interest has been largely triggered by the Euro experience. Scholars and policy makers have asked about the optimal number of currencies in the world economy. They have analyzed whether different countries satisfy the traditional “optimal currency area” criteria. These include: (a) the synchronization of the business cycle; (b) the degree of factor mobility; and (c) the extent of trade and financial integration. In this paper I analyze the desirability of a monetary union from a Latin American perspective. First, I review the existing literature on the subject. Second, I use a large data set to analyze the evidence on economic performance in currency union countries. I investigate these countries’ performance on four dimensions: (a) whether countries without a national currency have a lower occurrence of “sudden stop” episodes; (b) whether they have a lower occurrence of “current account reversal” episodes; (c) what is their ability to absorb international terms of trade shocks; and (d) what is their ability to absorb “sudden stops” and “current account reversals” shocks. I find that belonging to a currency union does not lower the probability of facing a sudden stop or a current account reversal. I also find that external shocks are amplified in currency union countries. The degree of amplification is particularly large when compared to flexible exchange rate countries.

Keywords: Regional; and; International; Currency; Arrangements (search for similar items in EconPapers)
JEL-codes: F41 F15 F33 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2006-06
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac and nep-mon
Note: On February 24-25, 2006 an international workshop on “Regional and International Currency Arrangements” was held in Vienna. It was co-sponsored by the Oesterreichische Nationalbank and the Bank of Greece, and jointly organized by Eduard Hochreiter and George Tavlas. Academic economists and researchers from central banks and international organizations presented and discussed current research, and reviewed and assessed the past experience with, and the future challenges of, international currency arrangements. A number of papers and the contributions by the discussants presented at this workshop are being made available to a broader audience in the Working Paper series of the Bank of Greece and simultaneously also in the Working Paper Series of the Oesterreichische Nationalbank. The papers and the discussants’ comments will be published in the journal, International Economics and Economic Policy. Here we present the fifth of these papers. (The previous four were issued as Bank of Greece Working Papers No. 39 to 42.) In addition to the paper by Sebastian Edwards, the Working Paper also contains the contribution of the discussant, Enrique Alberola.
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Related works:
Journal Article: Monetary unions, external shocks and economic performance: A Latin American perspective (2006) Downloads
Working Paper: Monetary Unions, External Shocks and Economic Performance: A Latin American Perspective (2006) Downloads
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