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

42 Pages Posted: 25 May 2005

Date Written: May 1, 2005


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.

Keywords: Exchange arrangements, monetary union, NAFTA, emerging markets

JEL Classification: F31, F33, F36

Suggested Citation

von Furstenberg, George M., Mexico in NAFTA: Welfare Dissipation Due to Lack of a Common Currency (May 1, 2005). Available at SSRN: or

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)


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