Computing and Testing a Stable Common Currency for Mercosur Countries

Journal of Applied Economics, Vol. 11, No. 1, pp. 193-220, May 2008

Posted: 17 Feb 2011 Last revised: 20 Nov 2012

See all articles by Ariel M. Viale

Ariel M. Viale

Florida Atlantic University

Nikolai V. Hovanov

Saint Petersburg State University

Mikhail V. Sokolov

Saint Petersburg State University; European University at St. Petersburg (EUSP) - Department of Economics; Russian Academy of Sciences (RAS) - Saint Petersburg Institute for Economics and Mathmatics

James W. Kolari

Texas A&M University - Department of Finance

Date Written: May 2008

Abstract

This paper develops a stable common currency for mid-sized open monetary economies with incomplete markets in general and the Mercosur countries in particular. The proposed currency is constructed as a derivative of a dynamic portfolio of securities that proxies the nominal exchange risk factors for a set of monies and floats against the rest of the world's currencies. We find that the resulting optimal common currency is comprised of currencies with country weights that are statistically significant and fairly symmetrical with relatively equal weight (e.g., 22% Argentinean pesos, 27% Brazilian reals, 27% Chilean pesos, and 23% Uruguayan pesos). We also find that increasing the number of countries in a common currency tends to increase its stability. The willingness of Mercosur countries to participate in a monetary union is assessed from statistical moments of the density functions of the implied stable common currency and its components.

Keywords: stable common currency, open monetary economies, regime switching models, Mercosur, currency basket

JEL Classification: F15, F33

Suggested Citation

Viale, Ariel M. and Hovanov, Nikolai V. and Sokolov, Mikhail V. and Kolari, James W., Computing and Testing a Stable Common Currency for Mercosur Countries (May 2008). Journal of Applied Economics, Vol. 11, No. 1, pp. 193-220, May 2008. Available at SSRN: https://ssrn.com/abstract=1177822

Ariel M. Viale

Florida Atlantic University ( email )

777 Glades Road
Boca Raton, FL 33431
United States
561-2972914 (Phone)
561-2972189 (Fax)

Nikolai V. Hovanov

Saint Petersburg State University ( email )

198904, Bibliotechnaya sq.2
Faculty of Economics
St. Petersburg
Russia
+7(812)164-2937 (Phone)
+7(812)164-4136 (Fax)

Mikhail V. Sokolov

Saint Petersburg State University ( email )

7-9, Universitetskaya nab.
Saint Petersburg, 199034
Russia

European University at St. Petersburg (EUSP) - Department of Economics

3 Gagarinskaya Street
St. Petersburg, 191187
Russia

Russian Academy of Sciences (RAS) - Saint Petersburg Institute for Economics and Mathmatics ( email )

Tchaikovsky st. 1
Saint Petersburg, 191187
Russia

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
448
PlumX Metrics