Mexico in NAFTA: Welfare-Benefit Dissipation Due to Lack of a Common Currency

41 Pages Posted: 4 Feb 2005

Date Written: February 2, 2005

Abstract

Except perhaps for the lead countries of global finance that may maintain a useful degree of monetary independence from each other, joining a regional monetary union boosts financial development. It enhances liquidity and depth of financial markets through the provision of sound money used over a wide area and provides implicit insurance against macroeconomic risks. This paper shows that, for Mexico unlike Canada, macroeconomic volatility is much greater during periods when the nominal exchange rate with USD changes appreciably than when it is quasi-pegged. This finding suggests that the benefits of monetary union are greatest for emerging-market countries inside an economically integrating region.

The study uses PPP-GDP data per person and per workhour from the Groningen (Netherlands) Growth and Development Centre.

Keywords: Exchange-rate arrangements, Monetary union, NAFTA, Emerging markets

JEL Classification: F31, F33, F36

Suggested Citation

von Furstenberg, George M., Mexico in NAFTA: Welfare-Benefit Dissipation Due to Lack of a Common Currency (February 2, 2005). Available at SSRN: https://ssrn.com/abstract=659101 or http://dx.doi.org/10.2139/ssrn.659101

George M. Von Furstenberg (Contact Author)

Indiana University ( email )

Department of Economics
Wylie Hall, Indiana University
Bloomington, IN 47405-6620
United States
812-856-1382 (Phone)
812-855-3736 (Fax)

HOME PAGE: http://mypage.iu.edu/~vonfurst/

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