Monetary and Exchange Rate Arrangements for Nafta

IMF Working Papers, March 1, 1993

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Monetary and Exchange Rate Arrangements for Nafta

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Bibliographic details

• Authors: Barry J. Eichengreen, Tamim Bayoumi
• Published: March 1, 1993
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451843804.001

Objective and scope

• Examines the extent to which the North American Free Trade Area (NAFTA) meets the criteria for a common currency area.
• Compares NAFTA with the European Community (EC), a regional grouping for which initial plans for a monetary union are already in place.
• Focuses on anticipated benefits and costs of monetary union and of abandoning independent exchange rate instruments.

Key findings

• Most of the anticipated benefits from a monetary union in the EC apply with equal force to NAFTA.
• Because the underlying disturbances are more diverse across members of NAFTA, the costs of abandoning the exchange rate instrument are likely to be higher.
• The higher costs are particularly pronounced when NAFTA is compared to the EC’s continental core.

Thematic emphasis and technical subjects

• Subject terms listed in the source:
  • Conventional peg
  • Economic integration
  • Economic theory
  • Exchange rates
  • Foreign exchange
  • Monetary unions
  • Supply shocks
• Keywords listed in the source include:
  • aggregate supply supply curve
  • Conventional peg
  • demand shock
  • EC member country
  • Europe
  • exchange rate uncertainty
  • Exchange rates
  • Monetary unions
  • North America
  • single currency
  • Southern Europe
  • supply and demand disturbance
  • supply curve
  • supply disturbance
  • Supply shocks
  • WP

Implications and analytical conclusion

• NAFTA could capture similar benefits from monetary union as the EC, but asymmetric and more diverse disturbances among NAFTA members increase the potential costs of currency unification.
• Policy trade-off highlighted: potential integration benefits versus loss of exchange rate as an adjustment instrument given heterogeneous shocks.