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: Suggested Citation