An Evaluation of Monetary Regime Options for Latin America

IMF Working Papers, December 1, 2002

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An Evaluation of Monetary Regime Options for Latin America

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Bibliographic details

• Authors: Andrew Berg, Paolo Mauro, Eduardo Borensztein
• Published: December 1, 2002
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451874853.001

Overview

• Paper assesses monetary regime options for Latin American countries.
• Core conclusion: the costs of a common currency are likely to outweigh its benefits for the region.
• Alternative regimes considered: common currency, unilateral dollarization, meaningful and useful floating.

Key findings

• Common currency:
  • Costs likely outweigh benefits because countries face diverse economic shocks.
  • Countries in the region do not trade much with each other.
  • They are affected by common international financial shocks only to the same extent as the average pair of emerging markets.
• Unilateral dollarization:
  • Would be desirable only for countries where there are strong links to the U.S. economy.
  • Would be desirable only if the credibility of the monetary authorities is irreversibly lost.
  • Would be desirable only where there is keen demand for dollar-denominated financial assets.
• Floating exchange rates:
  • Some countries in the region seem to be good candidates for meaningful and useful floating.

Policy implications and recommendations

• Avoid pursuing a regional common currency given diverse shocks, limited intra-regional trade, and no special sensitivity to common international financial shocks beyond the emerging-market average.
• Consider unilateral dollarization only under the specific conditions identified:
  • Strong economic links to the U.S. economy.
  • Irreversible loss of monetary authority credibility.
  • Keen demand for dollar-denominated financial assets.
• For countries that meet appropriate criteria, adopt or maintain meaningful and useful floating exchange rate regimes.

Subject areas and keywords (as listed)

• Subject: Currencies, Emerging and frontier financial markets, Exchange rate arrangements, Exchange rates, Floating exchange rates, Foreign exchange, Inflation, Money, Prices
• Keywords: Central America, common currency, country, Currencies, currency union, dollarization, East Asia, exchange rate, Exchange rate arrangements, exchange rate regimes, Exchange rates, floating exchange rate regime, Floating exchange rates, Inflation, inflation pass-through, inflation rate, inflation stabilization objective, nominal interest rate, regime, South America, unit of account, Western Europe, WP

Content in this bundle

• An Evaluation of Monetary Regime Options for Latin America - WP/02/211
  • An Evaluation of Monetary Regime Options for Latin America - WP/02/211 (Markdown version)
  • An Evaluation of Monetary Regime Options for Latin America - WP/02/211 (PDF)