Regional Currencies Versus Dollarization: Options for Asia and the Americas

Abstract

This paper undertakes an empirical assessment of Dollarization versus regional currency union as options for the economies of East Asia, South America and Central America. We use summary indicators of bilateral integration to examine the determinants of real exchange rate volatility within each region and between each region and the United States. While Europe is characterized by a high degree of regional integration, there is evidence of increasing integration in East Asia and persistently low integration in the Americas, especially as compared to the levels of bilateral integration vis-a-vis the United States. Our estimates confirm the patterns of regional integration above and reveal substantial regional differences as to the determinants of real exchange rate volatility.

Keywords: Exchange Rates, Currency Areas, Dollarization, East Asia, Europe, South America, Central America

JEL Classification: E42, F15, F31, F33, F36