A Centralized Monetary Union for Mercosur: Lessons from Emu

25 Pages Posted: 27 Dec 2006

See all articles by Michele U. Fratianni

Michele U. Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Universita' Politecnica delle Marche

Andreas Hauskrecht

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: April 2002

Abstract

The paper starts with the assumption that the Mercosur countries have decided to pursue monetary integration. These countries have essentially two options: a decentralized monetary union (MU) whereby each member country either pegs to the U.S. dollar or dollarizes outright; or a centralized MU with its own currency, its own central bank, and the adoption of common minimum financial standards. A centralized MU is preferable to a decentralized one, although it is more complex and involves significant institution building. On the other hand, a centralized monetary union enjoys the flexibility of counteracting union-wide shocks and gives member countries a say in the conduct of the common monetary policy; neither feature is present in a dollarized economy. A centralized monetary union cannot be built overnight: it took 30 years for EMU to become a reality. We stress a rather long transition approach during which member countries give independence to their national central banks and pursue inflation targeting, while adjusting to idiosyncratic shocks. The final phase would be consummated when economic and financial integration would have made shocks sufficiently symmetric in the region and inflation rates would have converged.

Keywords: monetary union, endogenous optimal currency area, integration, Mercosur

JEL Classification: E42, F31, F33, F42

Suggested Citation

Fratianni, Michele and Hauskrecht, Andreas, A Centralized Monetary Union for Mercosur: Lessons from Emu (April 2002). Available at SSRN: https://ssrn.com/abstract=953757 or http://dx.doi.org/10.2139/ssrn.953757

Michele Fratianni

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-3360 (Phone)
812-855-3354 (Fax)

Universita' Politecnica delle Marche ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
39-071-2207120 (Phone)

Andreas Hauskrecht (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

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