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Macroeconomic Coordination and Monetary Unions in a N-country World: Do all Roads Lead to Rome?

Federico Sturzenegger and Andrew Powell

Business School Working Papers from Universidad Torcuato Di Tella

Abstract: In Europe, twelve countries have joined a currency union but four have stayed out. The EU enlargement process implies a large set of potential EMU entrants. In Latin America, two countries have recently dollarized and regional currencies have also been a recurring theme. We develop a theoretical model in which countries are exposed to real and monetary shocks of both a systemic and individual nature. The model suggests when countries should float, form a CU or fix to an anchor as a function of their sensitivity to systemic shocks and the size of individual shocks. In an empirical analysis we consider a set of countries in Latin America. We find that what is beneficial for a given country depends on the actions of others. Integration may then be path dependent, and all roads may not lead to Rome.

Pages: 25 pages
Date: 2002
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