A Centralized Monetary Union for Mercosur: Lessons from Emu
25 Pages Posted: 27 Dec 2006
Date Written: April 2002
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: Suggested Citation